Dick's Sporting Goods Makes a Big Bet On a Key Category

Retailers of all stripes have universally warned of a slowing economy this year, weighed down by rising prices from inflation. As a result, consumers were going to spend less on discretionary items like clothing and electronics.

While true, the evidence also shows that consumers will spend money on merchandise they really want. Which means a retailer’s performance really comes down to what it can control (execution) versus what it can’t (economy).

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Perhaps the best examples of this are Dick’s Sporting Goods Inc.  (DKS) - Get Free Report and Foot Locker Inc.  (FL) - Get Free Report. Shares of Foot Locker fell hard after the retailer unexpectedly reported poor first quarter results, forcing it to cut its annual sales forecast.

“Our sales have since softened meaningfully given the tough macroeconomic backdrop, causing us to reduce our guidance for the year as we take more aggressive markdowns to both drive demand and manage inventory,” CEO Mary Dillon said.

Yet Dick’s Sporting Goods, which presumably operates in the same economy as Foot Locker, said comp sales in the first quarter jumped an impressive 3.2%. Even more noteworthy, consumers were spending more per transaction.

Dick's gunning for footwear

You could argue Dick’s Sporting Goods and Foot Locker don’t offer an apples to apples comparison (Dick’s sells in more categories, like apparel and sports equipment, than Foot Locker). But that argument disintegrates when you realize that both retailers compete in one key category: footwear.

Dick’s Sporting Goods won’t break out sales per category but said footwear drove much of its first-quarter sales bump.

“I will say footwear was a very solid -- very strong contributor to us over the course of the quarter,” CEO Lauren Hobart told analysts. “We think footwear is the engine that drives the train. Footwear is a really important part of our entire assortment. And so, we're not looking at a time when footwear becomes less of a driver to top-line sales. We just continue to try to elevate our assortment and our products for our athletes to come in.”

Moreover, the retailer is gunning for more: it plans to convert 100 stores this year to include its premium full service footwear format. That means 75% of its 800 stores across the United States will feature this enhanced section.

“The premium footwear Dick’s are a key part of our strategy,” Hobert said.

Dick’s Sporting Goods holds some significant structural advantages over Foot Locker. The latter’s locations are still weighed toward struggling traditional malls, a reality Dillon is trying to correct by closing such stores and expanding into more off-mall locations like lifestyle centers.

Foot Locker Trailing Dick's in Digital Sales

Dick’s Sporting Goods’ digital game is also far superior to Foot Locker. For online orders, the company offers one hour in-store/curbside pickup and same day delivery thanks to its partnership with DoorDash. The company fills 70% of its online orders through its stores.

A report by Coresight Research this year found that among apparel specialty retailers, Dick’s Sporting Goods, along with T.J. Maxx/Marshalls, Ross Stores, Old Navy, H&M and Victoria's Secret are the six major destinations for U.S. consumer apparel and footwear shopping.

As a result, Dick’s Sporting Goods said omnichannel consumers, those who shop both online and in-store, accounted for 65% of its total sales, compared to just 7% for Foot Locker. Both retailers say these consumers are the most valuable because they spend several times more money than people who shop exclusively online or in stores.

Foot Locker has a lot going for it. DeAnn Campbell, a strategy and retail consultant, praises the company’s efforts to beef up its private label brands and position their real estate around more relevant locations with 3 different formats that reflect the surrounding community and local talent. And CEO Dillon is one of the best in the business, she said.

Compared to Dick’s Sporting Goods’ core customers, “athletes” who value performance and durability, Foot Locker’s strategy is centered more around fashion-based “sneaker culture.” To that effect, Foot Locker boasts a strong social media game but needs to turn that popularity into actual sales.

But any way you look at it, Dick’s Sporting Goods is rapidly expanding into footwear, which means it poses a bigger and bigger threat to Foot Locker.