The reference to shrink is the first that Dick's has made in an earnings call or press release in nearly 20 years, according to FactSet. that reported earnings last quarter, the reference comes at a time that Dick's from numerous sources, including a slowdown in its outdoor category, which includes hard goods like camping equipment.
Dick's gross margins fell to 34% compared with 36% in the year ago period. Analysts had been expecting gross margins of 36%, according to StreetAccount.
During the quarter, Dick's aggressively marked down outdoor merchandise to clear out inventory and make way for new items, which cut into its gross margin by about 1.7 percentage points, Chief Financial Officer Navdeep Gupta said on a call with analysts. Overall, inventories were down about 5% in the quarter compared with the year ago period.
Shrink, on the other hand, hurt gross margins by about 0.85 percentage points, Gupta said, acknowledging the bulk of the retailer's profit crunch came from the actions it took to clear out excess inventories.
"The biggest impact in terms of the surprise for Q2 primarily came from shrink," said Gupta. "We thought we had adequately reserved for it. However, the number of incidents and the organized retail crime impact came in significantly higher than we anticipated and that impacted our Q2 results as well."
Gupta noted the company typically does a physical inventory count once a year, right before the back to school season, which is when it noticed the elevated shrink levels. Because Dick's did a physical count, it was able to accurately quantify just how much of an impact shrink had.
However, the company didn't disclose how much of its shrink was theft versus other factors, including damage and vendor fraud, and said only that theft drove the losses. Given the increased risk of shrink, Dick's is considering revisiting how it does inventory counts so it can keep closer tabs on the issue, Gupta said.
"This is not just a Dick's Sporting Goods challenge. This is a collective retail challenge," said Gupta. "For now, for the near term, we do anticipate this will remain with us."
Earlier this month, CNBC published a that examined the claims retailers make about it and the action companies and policymakers are taking to combat it. While retail crime is a serious concern, it's a metric that's and one retailers aren't required to disclose. Experts said that some retailers could be to obscure internal challenges, such as promotions and bloated inventory levels.
Following Tuesday's earnings report, Dick's is on pace for its worst day ever since its October 2002 IPO and is trading four times its 30-day average volume.
While the quarter is a bit rough compared with Dick's usual reports, the retailer is still holding on to its Covid pandemic gains. Its profits are up compared with 2019. It opened seven new House of Sport locations during the quarter and plans to continue opening new doors ahead. The sprawling specialty stores, which are up to 100,000-square-foot facilities, are interactive and geared toward its athlete customer base. The new stores are "yielding tremendous results," said Gupta.
Same-store sales were up 1.8% in the quarter, compared with down 5.1% in the year-ago period, and were driven by a 2.8% uptick in transactions. Analysts had been expecting them to be up 2.7%, according to StreetAccount.
In a bid to streamline its cost structure and reinvest in different parts of the business, the company cut less than 1% of its global workforce on Monday, primarily at its customer support center. The cuts largely impacted headquarter roles and account for less than 10% of corporate positions, Stack said.
The cuts will cost about $20 million in severance expenses in the next quarter and may result in additional one-time charges of $25 million to $50 million.
Stack cautioned that the cuts were not a cost-saving strategy but rather an attempt to reallocate resources.
"We are going to reinvest all of these dollars back into talent and the technology that we want," said Stack. "So this was not a cost-cutting move."
— CNBC's Courtney Reagan contributed to this report
