Lex Blog
I think we all recognize that the disruptions from the COVID pandemic continue to reverberate through the economy. Many industries and many companies are still trying to get back to equilibrium. The pandemic continues to impact companies, their operations, and their financial results. A new lawsuit filed against the sporting goods retailer Dick’s Sporting Goods(DSG) illustrates how the pandemic-related factors continue to affect companies and translate into securities litigation. DSG was one of the companies that prospered at the outset of the pandemic; when conditions normalized, the company claimed it would be able to keep the positive momentum going. However, after the company announced disappointing results, its share price declined, and now a shareholder plaintiff has filed a securities class action lawsuit, in the latest in a series of COVID-related securities suits. A copy of the February 16, 2024, lawsuit against the company can be found here.
Background
DSG operates sporting goods retail stores under a number of different nameplates. During the pandemic, the company prospered. The securities complaint alleges that the company “benefitted from the macroeconomic tailwinds caused by the government stimulus programs, and the Company’s sales and profitability grew consistently throughout 2021.” In particular, the company’s margins “surged.” The pandemic-related conditions apparently benefitted certain categories of product – what the company called “COVID winners,” among them the company’s Outdoor segment.
As the circumstances normalized in 2022, DSG, the complaint alleges, “touted its ability to maintain significantly improved post-pandemic margins and earning, but misrepresented and omitted the extent to which demand for certain inventory, especially in the Outdoor segment.” In addition, several executives, named as defendants in the securities suit, sold shares in their personal holdings of DSG stock.
The complaint alleges that beginning in May 2022, the company made a series of statements to suggest that while the post-pandemic macroeconomic circumstances were normalizing, the company had undergone “transformation” and “fundamental changes” that would allow the company to sustain its advantageous merchandise margin. These supposed changes included leveraging relationships with suppliers to obtain exclusive access to certain products; improving pricing technology in ways that would eliminate the need for promotions; and the development of outlet stores that allowed it to move clearance products. The complaint alleges that in numerous statements during the class period, the company said it margins would remain “elevated” as a result of these “structural” improvements.
However, on August 22, 2023, the company announced disappointing results for the second quarter of fiscal 2023 and attributed significantly reduced margins and profitability primarily to promotional sales of excess Outdoor inventory. According to the complaint, the company’s share price decline 24% on this news.
The Lawsuit
On February 16, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Western District of Pennsylvania against DSG and certain of its directors and officers. The complaint purports to be filed on behalf of a class of DSG investors who purchased the company’s securities between May 25, 2022, and August 21, 2023.
The complaint alleges that during the class period the defendants misrepresented or omitted to disclose that: “(a) demand for products in DSG’s Outdoor segment was slowing faster than defendants represented, resulting in excess inventory; (b) the ‘structural changes’ that defendants repeatedly touted, including differentiated products, improving pricing technology, and more efficient clearance channels, did not allow the Company to manage its excess inventory without hurting the Company’s profitability; (c) the need to liquidate excess inventory, including in the Outdoor segment, would have a materially negative effect on the Company’s profitability; and (d) as a result of (a)-(c) above, defendants’ statements about DSG’s business condition and prospects were materially false and misleading when made.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
Discussion
We are just about to begin what will be the fifth year since the initial COVID outbreak in the U.S. Even though the pandemic wound down some time ago, the lingering effects from the pandemic continue to reverberate. Many companies are struggling to return to equilibrium after the disruptive impact of the government shutdown order and the distortive impact of governmental stimulus money. The lingering effects continue to drag on some companies; in a way, it is almost as if some companies have a peculiar form of “long COVID.”
Whatever the reason, it is clear that even now, as we prepare to enter the fifth year since the initial COVID outbreak in the U.S., some companies not only continue to feel the effects from the pandemic, but these impacts in some cases continue to translate into COVID-related securities lawsuits.
It is interesting to note that even though we are about to start the fifth year since the initial COVID outbreak, this new lawsuit against DSG is already the third COVID-related lawsuit to be filed so far in 2024. In January 2024, plaintiffs’ lawyers filed COVID-related securities suits against BioNTech and BioVie (as noted here and here, respectively). I have to say that I really did not expect the filing of COVID-related litigation to be a thing this year, but here we are. The fact is that the COVID-related securities suits continue to be filed.
In any event, by my count, there have been a total of 74 Covid-related securities class action lawsuits filed since March 2020. The pandemic certainly stirred things up, and apparently it continues to stir things up. It will be interesting to see as the year unfolds whether these belated COVID suits continue to be filed.
