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Dick's (DKS) Up 10.7% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Dick's Sporting Goods (DKS). Shares have added about 10.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Dick's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

DICK'S Sporting Beats on Q2 Earnings, Raises View

DICK'S Sporting delivered robust second-quarter fiscal 2019 results, wherein earnings and sales surpassed the Zacks Consensus Estimate and also grew year over year. Notably, this marked the second successive quarter of positive earnings and sales surprise.

Results gained from solid same-store sales performance. Also, the company’s three primary categories of hardlines, apparel and footwear, and brick-and-mortar stores improved during the quarter. Further, its e-commerce channel remained strong.

Q2 in Details

In the fiscal second quarter, DICK'S Sporting reported earnings of $1.26 per share, exceeding the Zacks Consensus Estimate of $1.21. Additionally, the company’s earnings rose 5% from the year-ago quarter’s adjusted earnings of $1.20.

Net sales of $2259.2 million grew 3.8% year over year and surpassed the Zacks Consensus Estimate of $2,201 million. Consolidated comparable store sales (comps) increased 3.2% year over year.

The company witnessed positive comps driven by rise in both average ticket and transactions. This marked its strongest quarterly comps since 2016. Further, e-commerce sales grew 21% year over year. E-commerce penetration improved to about 12% of net sales in the reported quarter, up from roughly 11% in the prior-year quarter.

Gross margin contracted 30 basis points (bps) to 30% in the quarter under review. This was due to a 65 bps decline in merchandise margins and higher occupancy costs, offset by increased shipping and fulfillment costs from sturdy e-commerce. SG&A expenses, as percentage of sales, expanded 31 bps year over year to 23.1% in the reported quarter.

Financial Aspects

DICK'S Sporting ended second-quarter fiscal 2019 with cash and cash equivalents of $116.7 million, nearly $441.5 outstanding borrowings under its revolving credit facility and total stockholders' equity of $1,765.1 million.

In the quarter under review, the company used $27.2 million in cash for operating activities. Total inventory rose 19% year over year at the end of the fiscal second quarter, driven by investments to support key growth categories. Moreover, total capital expenditure in the quarter amounted to nearly $111 million (on a gross basis) and $89 million (on a net basis).

For fiscal 2019, management expects capital expenditure to be nearly $230 million (on a gross basis) and $200 million (on a net basis).

In second-quarter fiscal 2019, the company bought back nearly 4.5 million shares for $159.3 million. It now has roughly $167 million under its standing authorization, extending through 2021.

On Jun 12, 2019, the company's board of directors approved an additional five-year share repurchase program of up to $1 billion of its common stock. On Aug 19, management announced its quarterly cash dividend of 27.5 cents per share, payable on Sep 27 to shareholders of record as on Sep 13.

Store Update

During the reported quarter, the company opened two new DICK'S Sporting Goods stores, while closed two. As of Aug 3, 2019, DICK'S Sporting operated 727 namesake stores across 47 states, 95 Golf Galaxy stores in 32 states and 35 Field & Stream stores in 16 states.

In fiscal 2019, the company plans to open eight namesake and two Golf Galaxy stores. Of these, it expects to inaugurate seven stores in the third quarter of fiscal 2019. Meanwhile, the company plans to relocate three namesake stores and two Golf Galaxy store.

During the second quarter, the company eliminated the hunting category from nearly 125 more stores (where the category is underperforming). This category was replaced with a more compelling assortment.

Guidance

Encouraged by better-than-expected fiscal second-quarter results, management raised its guidance for fiscal 2019. The company now anticipates same-store sales to be up low-single digit as compared to a decline of 3.1% in fiscal 2018. The company now expects adjusted earnings to be $3.30-$3.45 per share, up from the earlier guided view of $3.20-$3.40.

Further, the company is focused on private brands and is on track to launch new brands as part of its $2-billion sales goal in private brands. Additionally, it is making efforts to improve its digital marketing efforts by strengthening partnerships with Google and Facebook. However, the company’s Athletic apparel business, especially footwear, will face the brunt of the recent increase in tariffs to 25% from 10% on products worth $200 billion imported from China.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

At this time, Dick's has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Dick's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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