Another Clean Sweep for Dick's

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Dick's Sporting Goods Inc.’s (DKS), a full-line sporting goods retailer, second-quarter 2012 adjusted earnings per share jumped 25% to 65 cents a share from the year-ago level of 52 cents a share, swaying past the company’s guidance range of 62 - 63 cents per share. Earnings per share also swept past the Zacks Consensus Estimate of 64 cents.

During the quarter, net sales grew 10% to $1,437.0 million driven by a 3.8% rise in consolidated comparable-store sales (comps) and opening of new stores. Total revenue also surpassed the Zacks Consensus Estimate of $1,433 million. The increase in comps was aided by a 2.9% rise in Dick's Sporting Goods store sales, 4.4% increase in Golf Galaxy store sales and a 34.6% growth in e-commerce business.

First quarter gross profit came in at $447.8 million, up 11.6% year over year, with gross margin expanding 50 basis points to 31.2%. Adjusted EBITDA in the quarter increased 18.6% year over year to $165.0 million, with EBITDA margin expanding 90 basis points to 11.5%.

Financial Aspects

Dick’s ended the second quarter of fiscal 2012 with cash and cash equivalents of $350.4 million, shareholders’ equity of $1,612.1 million and no outstanding borrowings under its $500 million credit facility. The company incurred net capital expenditures of $95.2 million for the six months of fiscal 2012. Inventory per square foot during the quarter spiked 4.2% compared to the year-ago quarter.

Dividend

Dick’s Sporting has always been committed to create value to its shareholders by returning capital in the form of dividends. To improve shareholders’ wealth, the company recently declared a quarterly dividend of 1.25 cents per share, payable on September 28, 2012 to shareholders of record as of August 31, 2012.

Store Update

In the reported quarter, Dick’s opened four Dick's Sporting Goods stores, bringing the total of Dick's Sporting Goods stores to 490 stores in 44 states. Additionally, the company operated 81 Golf Galaxy stores in 30 states at quarter end.

Guidance

For the third quarter of fiscal 2012, Dick’s expects earnings per share of 36 cents, compared with the year-ago earnings of 32 cents. Comps for the upcoming quarter are expected to rise 4% against a 4.1% rise recorded last year. Moreover, Dick’s plans to further expand its stores network in the third quarter by opening 21 more Dick's Sporting Goods stores and relocating 3 of them.

For fiscal 2012, management expects earnings in the range of $2.47 to $2.51 per share, while comps are expected to increase in the 4%-5% range. For fiscal 2012, the company plans to open approximately 38 Dick's Sporting Goods stores. Moreover, the company also plans to relocate about five Dick’s Sporting Goods stores and one Golf Galaxy stores in 2012.

For 2012, the company expects to incur capital expenditures of $241 million on a gross basis and $190 million on a net basis.

Our Take

Pittsburgh-based Dick's Sporting Goods remains the dominant player in the industry with significant store expansion and potential share gain opportunities in the U.S. The company’s outlook for 2012 looks bright given the company’s continued investments in new stores and e-commerce business as well as in practices that drive margin expansion including inventory management, private brands, and product mix shift.

However, the sporting goods market is highly competitive in nature and Dick’s failure to compete effectively in terms of price, quality or product will thwart its growth potential. The company faces stiff competition from Foot Locker Inc. (FL) and Wal-Mart Stores Inc. (WMT). Moreover, a weak economy will likely continue to weigh on the company’s profitability in the long term.

Dick's Sporting Goods currently has a short-term Zacks #2 Rank (Buy). We maintain our long-term Neutral recommendation on the stock.

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