Dick's Sporting Goods (NYSE: DKS) experienced a sharp sell-off in premarket trading on Tuesday, with shares dropping 16.4% after the company reported second-quarter earnings and revenue that fell short of Wall Street expectations. The disappointing results, coupled with a downward revision to its annual outlook, underscored the ongoing challenges in the athletic footwear market, particularly at its recently acquired Foot Locker business.
The company reported adjusted earnings per share of $3.53, missing the consensus estimate of $3.76 by 6.2%. Revenue came in at $5.59 billion, slightly below the expected $5.64 billion, representing a 1.0% shortfall. The top-line figure was bolstered by the inclusion of Foot Locker, which contributed to a 53.2% year-over-year increase in total sales. However, the integration of Foot Locker also weighed heavily on profitability, with GAAP operating margin contracting by 451 basis points to 7.9%.
Investors were particularly alarmed by the company's decision to lower its full-year adjusted EPS guidance by 17.9% at the midpoint, now projecting $11.50 per share, down from the previous $14.00. This significant cut, which nearly mirrors the percentage decline in the stock price, was driven by a weaker-than-expected performance at Foot Locker. The segment posted a loss of $31.9 million in the quarter, and comparable sales at Foot Locker fell 3.6% on a pro forma basis, while core Dick's stores continued to grow, with comparable sales up 4.9%.
Executive Chairman Ed Stack attributed the underperformance to recent footwear launches that "performed below both industry and our expectations," as well as an overexposure to older product models at Foot Locker. The company now expects Foot Locker to incur a segment loss of between $40 million and $80 million for the full year, a stark contrast to the previously anticipated growth. The revised guidance also reflects a more cautious outlook for the overall footwear market, which has been hampered by increased promotional activity and softer consumer demand.
Inventory levels have emerged as another area of concern. Total inventory surged 63% to $5.57 billion, with approximately $2.0 billion attributable to Foot Locker. Core Dick's inventory increased by a more modest 6%. The elevated inventory positions could necessitate additional markdowns in the coming quarters, potentially pressuring margins further. To date, Dick's has incurred $515.8 million in restructuring costs related to the Foot Locker acquisition, and total charges are expected to reach $750 million. The company has already shuttered 110 Foot Locker stores in fiscal 2026 as part of its integration plan.
The market's reaction was swift and severe. DKS shares were trading at $149.94 at 08:27 EDT, down sharply from Monday's closing price of $179.33. This plunge erased roughly $2.6 billion from the company's market capitalization, which stood at $16.05 billion at the end of the previous session. The sell-off reflects growing investor skepticism about the company's ability to revive Foot Locker's performance amid a challenging retail environment.
Analysts, who had largely maintained bullish ratings on the stock prior to the earnings release, are now reassessing their positions. The average price target of $259.57, based on ratings from 13 Buy and four Hold recommendations, is currently 73% above the premarket price, suggesting that many targets are likely to be revised downward. The absence of any Sell ratings highlights the uncertainty surrounding the stock's near-term trajectory.
Looking ahead, key risks include the potential for intensified promotional activity, Foot Locker losses exceeding current expectations, and the need for markdowns to clear excess inventory. Conversely, a faster-than-expected recovery in the footwear market could prove the sell-off to be overdone. For now, investors are bracing for a challenging second half as Dick's navigates the integration of Foot Locker and the volatile consumer spending landscape.
