Sometimes it all comes together, in one conference call, the entire panoply of what's going right and what's going wrong in the enterprise in this day in age.
We got one of those calls today, the conference call from Dick's Sporting Goods (DKS) , the gigantic, nationwide retailer. And on a day where the stock of Boeing (BA) once again weighed heavily on the averages, I'd like to take the time to show you how I learn from what went wrong at this large retailer, with a stock under severe pressure, plummeting ten percent.
Now before I get to Dick's let me just say a word about Boeing, a stock that, once again, got rocked after a host of international airlines grounded the 737 MAX line that was involved in two separate, but seemingly similar crashes. Boeing's stock distorts the entire Dow index which is too heavily weighted toward the aircraft maker's stock. Days like Monday, where the Dow opened down 242 points or Tuesday where Boeing's second day of decline, took a big chunk off of the Dow, remind us of how distorted the old index is and both the S&P 500 and the Nasdaq spent another day in the black, the latter solidly so.
Boeing's in an intractable position. It can't find anything wrong. The FAA can't find anything wrong. But country after country is grounding the plane. That's crushing the stock and I offer no solution to owning it other than Boeing's been through many a hard time and come out fine. That said, I hesitate to buy it yet given that we are still in the shoes drop phase of the process.
There are other, less risky, situations that can be bought right now and they can be discerned by doing the homework that's integral and allows you to trust the stock process.
That's why I want to explore the world of Dick's because it can teach you more about what's happening in the overall market than anything else I saw Tuesday.
To set the stage, Dick's reported an OK quarter, not great, not bad, but it gave a murky outlook. If you didn't know any better you would conclude that Dick's is gloomy about both the consumer and the future itself. Nope, not at all. The sporting goods customer is spending as much as ever.
The problem is where the consumer is spending the money: online. In one year's time, the online business increased to 23% compared to 19% a year ago. And although there were issues last year that distorted last year's website to the negative, you can see how things are going.
I remember 17 years ago when Dick's came public. It was a radical concept, a big box store for all things sport and the stock rapidly went from split adjusted three to thirty-four in five years and then it took nine years to run to $62 and now it has round tripped to $34.
Have people lost their interest in sporting goods including apparel? Absolutely not. Does it suddenly have more store competition? I should say not. In fact, its number one competitor, Sports Authority, closed all 463 stores in May of 2016 leaving the bricks-and-mortar field to Dick's with more than 700 stores.
So what happened?
Pretty much one word: Amazon (AMZN) . Much of the stuff that Dick's sells can be bought on Amazon. No, not the private label Dick's. And not some of their special Nike's (NKE) or outdoor and fitness equipment, both of which posted strong year-over-year sales.
No, it's Amazon and that means that Dick's has to both spend even more money building out its omnichannel experience and suffer from lower gross margins because you just can't make as much money online as offline.
Dick's knows that it has to constantly update its website because that's what Amazon does and that costs money, more money for Dick's than it does for Amazon. So, Dick's dropped the bomb that has destroyed the stocks of many a retailer this period -- the company said it would have to spend to keep up with its competitors.
Yep, it has to invest.
Sporting goods buyers may like the choice between Amazon and Dick's but investors hate it. Investment means building out dedicated e-commerce fulfillment capabilities and those who fall behind, like Sears (SHLDQ) , for example, never come back. There's no choice but to do it and it ruins any company's margin s because it is so expensive.
As Lauren Hobart, president of Dick's explains: Looking ahead, she said, there's a "big opportunity to continue improving our online experiences to faster and more reliable delivery." To do this, Hobart says "we're investing heavily in our fulfillment capabilities." That's expensive without a clear payoff.
Hobart says the company has to invest in robotics to drive automation to optimize its cost per shipment, something that's almost pyrrhic when you think about the fire power that Amazon has with its amazing Amazon Web Services business. This is a company that's supposed to know sporting goods, like baseball bats and Air Jordans, not robotics for heaven's sake. As Hobart, says, though, they have no choice but to continue to "increase our investments in technology talent and capabilities to make the shopping experience easier and more convenient for all athletes regardless of when, where or how they shop with us."
Ugh. They have to keep plowing money into the most expensive, least-rewarding channel to keep up with a company with much lower expenses.
It gets worse. What does Dick's have to do to beat the hustings for more customers? "We also work closely in partnership with industry leaders, Google (GOOGL) and Facebook (FB) to dial up digital marketing and drive increase traffic."
So it's not enough to have to get your head beat in by Amazon, you have to pay the Facebook/Google piper to reach the consumer because you can't just rely on people going to the homepage of Dick's. No wonder Senator Elizabeth Warren is calling for the break-up of Amazon. It has all of the tools it needs to bring you in without having to fork over money to Facebook or Google.
There's even worse news. Part of the reason why Dick's can't make as much money per sale? Lee Belitsky, the company's chief financial officer, explains: "the decline in gross margins was driven by higher shipping, fulfillment and freight costs." Again, to keep up with Amazon you have to get the stuff to the customer as cheaply and as quickly as Amazon and that means you have to eat costs, including those of the pesky truckers which just gets more and more expensive.
Finally, Hobart said that the company has to invest in the stores themselves and their teammates to offer better service. That means higher store costs and more deadweight training of the individuals who work there. And if the customer doesn't come in? The company's spending on its mobile and tablet sites.
Now we do get some other investment ideas. Under Armour (UAA) "continues to be difficult," according to Belitsky, in case you wondered about why that stock's been languishing lately. Nike's just on fire in pretty much everything it touches, including apparel, and, of course, shoes.
And we learned that CEO Ed Stack believes that rents will continue to go down for shopping centers in part because of closures by Sears and J.C. Penney's (JCP) "and a number of other retailers that are probably going to continue to close stores." That makes me want to stay away from the mall and the shopping center REITs.
What's the conclusion here? Simple, after reading this epistle I come back with a few insights. Buy the stocks of Amazon, Facebook, Alphabet, owner of Google, and Nike and perhaps Adobe Systems (ADBE) and Salesforce.com (CRM) to make sure that the customer likes the experience and remembers to come back.
Invest in the robotics that Honeywell (HON) provides to Amazon.
As for Dick's, I think you have to stay away, as it is just too hard right now to be in a bricks-and-mortar retailer selling goods that can often be found cheaper and gotten faster online.
Amazon, Facebook, Google, Salesforce and Honeywell are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.