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Why Is Dick's Sporting (DKS) Down 2.7% Since the Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Dick's Sporting Goods Inc DKS. Shares have lost about 2.7% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? 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  Q1 Earnings Meet, Sales Miss Estimates

DICK’S Sporting posted first-quarter fiscal 2017 results wherein quarterly adjusted earnings of $0.54 per share came in line with the Zacks Consensus Estimate, while it increased 8% year over year. Notably, earnings came in the higher end of the company’s guidance range of $0.50–$0.55 per share.  On a GAAP basis, earnings per share rose 4% to 52 cents.

Net sales advanced 9.9% to $1,825.3 million, while missing the Zacks Consensus Estimate of $1,833 million. Consolidated comps grew about 2.4%, lagging the company’s forecast of 3–4% increase.

Comps gained from improvement in both, ticket and traffic. The year-over-year growth amid a tough retail backdrop was attributable to improvement witnessed across all major categories including apparel, footwear and hardlines, along with solid performance by the company’s latest online site. Further, results continued to gain from the consolidation in the sporting goods space, and opportunities arising from the liquidation of rivals The Sports Authority (TSA), Sport Chalet and Golfsmith.

Delving Deeper

Backed by the growth of its omni-channel network and launch of the latest e-commerce site in the first quarter, DICK’S Sporting’s e-commerce sales surged 11% in the quarter. Notably, the e-commerce business constituted 9.3% of the total sales in the quarter, slightly higher than 9.2% in the year-ago period.

Gross margin contracted 17 basis points (bps) to 29.69%. Benefits from enhanced merchandise margins were countered by higher shipping and fulfillment expenses.

Further, the operating income dipped 0.8% to $90.1 million, while the operating margin contracted about 53 bps to 4.9%, because of selling, general and administrative expenses deleverage (as a percentage of sales).

Financial Aspects

DICK’S Sporting ended the quarter with cash and cash equivalents of $108.4 million and shareholders’ equity of $1,960.8 million. Further, the company had $92 million as outstanding borrowings under its revolving credit facility as of Apr 29, 2017.

During the quarter, DICK’S Sporting generated roughly $36.5 million cash from operating activities. Total inventory at quarter end grew 10% on a year-over-year basis, while total capital expenditures during the quarter amounted to nearly $113.9 million (on a gross basis) and $88.8 million (on a net basis).

For fiscal 2017, the company still anticipates capital expenditure of $465 million on a gross basis and $350 million on a net basis.

Dividend and Share Repurchases

DICK’S Sporting has always created value for shareholders by returning capital in the form of dividends and share repurchases.

The company paid dividends worth nearly $19.3 million during the quarter. On May 11, management declared a quarterly cash dividend of 17 cents per share on the company's Common Stock and Class B Common Stock. This is payable on Jun 30 to shareholders of record as on Jun 9.

Further, Dick's Sporting repurchased roughly 0.5 million shares worth $23 million during the quarter, following which it had shares worth roughly $1.0 billion remaining under its standing authorization that extends through 2021.

Store Update

During the quarter, DICK’S Sporting inaugurated 15 namesake stores, two Field & Stream outlets and eight Golf Galaxy stores. Moreover, the company relocated two namesake stores, alongside shuttering one golf Galaxy store down. These actions took the total store count, as of Apr 29, to 691 DICK'S Sporting Goods stores across 47 states, 98 Golf specialty stores in 32 states, and 29 Field & Stream stores in 14 states.

However, given the current real estate scenario and the challenges looming over the retail space, many retailers have opted for store closures. Following suit, DICK’s Sporting also announced plans to bring a slowdown in its store growth plan. The company plans to reduce its store openings significantly from 43 namesake openings expected in fiscal 2017, to 15–20 anticipated in fiscal 2018, narrowing down to 5 to no store openings in fiscal 2019.
 
Delving deeper into the plans for fiscal 2017, the company aims to open nearly 43 new namesake stores (including conversion of 19 old TSA stores), eight new Field & Stream outlets and Golf Galaxy stores (including conversion of some Golfsmith stores), each. Also, it intends to relocate six namesake stores and one Golf Galaxy store.

In the second quarter of fiscal 2017, the company plans to open 13 new namesake stores, which also includes conversion of some old TSA stores.

Guidance

Management remains hopeful of driving future growth and capturing market share, given the success of its latest e-commerce platform and impressive progress on its recent merchandise plan of reducing vendor base, concentrating on areas with greater growth potential and optimizing collection. Also, the company remains focused on cutting down costs and amending its operating structure in an attempt to sponsor long-term growth initiatives.

Management also foresees continued gains in regions exited by its rivals TSA and Golfsmith. Further, outdoor retailer Gander Mountain is expected to liquidate all its stores by August end. While this will help DICK’s capture further market share once the liquidation is concluded, it expects third-quarter sales to be somewhat dented by this liquidation. This is because management at DICK’s Sporting expects out of business sales by Gander to cause customers to stock up on firearms, ammunition and other hunting and fishing products discounted.

All said, the company reiterated its fiscal 2017 earnings outlook, while slightly adjusting its sales view.

For fiscal 2017, which will have an additional week, the company continues to expect adjusted earnings to range from $3.65–$3.75 per share. The company envisions GAAP earnings to come in a band of $3.59−$3.69 per share. Consolidated comps growth for fiscal 2017 is now anticipated in a range of 1–3%, compared with 2–3% projected earlier.

For the second quarter of fiscal 2017, the company envisions earnings per share to lie in the band of $1.02 – $1.07, while it anticipates comps growth to range from 2–3%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter compared to two lower.

Dick's Sporting Goods Inc Price and Consensus

 

Dick's Sporting Goods Inc Price and Consensus | Dick's Sporting Goods Inc Quote

VGM Scores

At this time, Dick's Sportings stock has a nice Growth Score of 'B', though it is lagging a lot on the momentum front with an 'F'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile 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.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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