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Why is DICK'S Sporting (DKS) Stock Down Despite Solid Q4?

Zacks Equity Research

Despite a challenging retail landscape, DICK’S Sporting Goods Inc. DKS released solid fourth-quarter fiscal 2016 results, wherein both sales and earnings surpassed expectations and improved year over year, with earnings marking its fourth successive beat.

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. Further, the company largely benefited from robust e-commerce performance.

However, shares of the company declined 8.6% on account of a soft outlook and management’s plans to eliminate up to 20% of its vendor base this year, as part of its business strategy. Per the strategy, the company is on track to remove vendors that generate lower volumes so that it can concentrate on its more important suppliers, alongside focusing on growth of its private brands. However, investors fear that the company might lose significant market share in the second half of fiscal 2017.  

As a matter of fact, DICK’S Sporting has unperformed the Retail-Miscellaneous/Diversified industry with its shares having plunged 19.2% in the past six months, compared with a mere 0.7% dip for the latter.
 



Q4 Highlights

The sporting goods company’s quarterly adjusted earnings of $1.32 per share were way above the Zacks Consensus Estimate of $1.29, rising 17% year over year. Results were driven by robust comps, along with gross margin expansion. Moreover, the bottom line exceeded the company’s guidance range of $1.19−$1.31 per share. On a GAAP basis, earnings per share slumped 28.3% to 81 cents.

Dick's Sporting Goods Inc Price, Consensus and EPS Surprise
 

Dick's Sporting Goods Inc Price, Consensus and EPS Surprise | Dick's Sporting Goods Inc Quote

Net sales advanced 10.9% to $2,483.4 million, also surpassing the Zacks Consensus Estimate of $2,472.3 million. Further, consolidated comps grew about 5%, including 5.3% comps growth at DICK’S Sporting Goods, along with a 13.2% increase at Golf Galaxy comps.

Comps gained from improvement in both, ticket and traffic. Further, considerable market share gains and improvement witnessed across all core categories including apparel, footwear and hardlines boosted the quarterly performance.

Delving Deeper

Backed by the growth of its omni-channel network, DICK’S Sporting’s e-commerce sales surged 27% to $440 million in the fourth quarter. Notably, the e-commerce business constituted 17.9% of the total sales in the quarter, up from 15.7% in the year-ago period.

Adjusted gross margin expanded 85 basis points (bps) to 30.85%. Benefits from enhanced merchandise margins and lower occupancy expenses were partly offset by higher shipping expenses related to the company’s e-commerce operations.

However, the operating income declined 15.9% to $449.9 million, while the operating margin contracted about 170 bps to 5.7%, because of selling, general and administrative expenses deleverage (as a percentage of sales).

Financial Aspects

DICK’S Sporting ended the year with cash and cash equivalents of $164.8 million and shareholders’ equity of $1,929.5 million. Notably, the company had no outstanding borrowings under its revolving credit facility as of the end of fiscal 2016.

During fiscal 2016, DICK’S Sporting generated cash worth roughly $759 million from operating activities. Total inventory at quarter end grew 7.3% on a year-over-year basis, while total capital expenditures during the quarter amounted to roughly $115 million (on a gross basis) and $49 million (on a net basis). For fiscal 2016, gross capital expenditures totaled $421.9 million, with net capital expenditures of $242.1 million.

For fiscal 2017, the company 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 its shareholders by returning capital in the form of dividends and share repurchases.

The company paid dividends worth nearly $16.7 million during the quarter. On Feb 9, management declared a 12% hike in quarterly cash dividend to 17 cents per share on the company's Common Stock and Class B Common Stock. This is payable on Mar 31 to shareholders of record as on Mar 10.

Further, Dick's Sporting repurchased roughly 0.6 million shares worth $29.7 million during the quarter. In fiscal 2016, the company bought back 3.1 million shares for $145.7 million, following which it had shares worth roughly $1.041 million remaining under its standing authorization that extends through 2021.

Store Update

DICK’S Sporting opened three former TSA stores under the DICK’S Sporting banner in the fourth quarter and shuttered down three namesake outlets; 13 Golf Galaxy outlets and two True Runner outlets. Additionally, the company bought 30 Golfsmith International stores, which are on track to be converted into the Golf Galaxy brand. Further, out of the 13 Golf Galaxy stores that were closed, 10 were situated close to an acquired Golfsmith store – which is likely to serve DICK’S Sporting’s customers better.

These actions took the total store count, as of Jan 28, to 676 DICK'S Sporting Goods stores across 47 states, 91 Golf specialty stores in 32 states, and 27 Field & Stream stores in 13 states.

In fiscal 2017, the company plans to open nearly 43 new namesake stores, eight new Field & Stream outlets and nine new Golf Galaxy stores. Also, it intends to relocate seven namesake stores and one Golf Galaxy store.

In the first quarter of fiscal 2017, the company plans to open 16 new namesake stores; 2 new Field & Stream stores and nine new Golf Galaxy stores, alongside relocating two namesake stores.

The new openings in both periods include conversion of some old TSA and Golfsmith stores, into DICK’S Sporting and Golf Galaxy outlets, respectively.

Guidance

Management remains impressed with its quarterly performance. Going forward, this Zacks Rank #3 (Hold) company expects to solidify its market position, by improving shoppers’ experiences at its stores; strengthening its brand value and e-commerce growth.

Further, management plans to implement a fresh merchandise strategy (as discussed above), through which it seeks to rationalize its vendor base and optimize its collection. This plan, along with the company’s digital endeavors is likely to keep it ahead of consumer trends, thus helping it combat competition.

However, management’s earnings and comps outlook for fiscal 2017 and the first quarter fell short of analyst expectations.

For fiscal 2017, the company expects adjusted earnings to range from $3.65−$3.75 per share. The Zacks Consensus Estimate is pegged at $3.77, which is likely to witness a downward revision. The company envisions GAAP earnings to come in a band of $3.63−$3.73 per share. Further, consolidated comps growth is anticipated in a range of 2–3%.

For the first quarter of fiscal 2017, the company envisions adjusted earnings per share to lie in the band of 50–55 cents, which is pegged much lower than the Zacks Consensus Estimate of 62 cents. On a GAAP basis, earnings are expected to range from 48–53 cents per share. Consolidated comps growth for the first quarter is projected to range from 3–4%.

Key Picks

Better-ranked stocks in the same industry include Big 5 Sporting Goods Corp. BGFV, The Children's Place, Inc. PLCE and Kate Spade & Company KATE.

While Big 5 Sporting flaunts a Zacks Rank #1 (Strong Buy),  The Children's Place and Kate Spade carry a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Big 5 Sporting has an average positive earnings surprise of 1.6% in the trailing four quarters. The stock, with a long-term growth rate of 12%, has seen positive estimate revisions in the last seven days.

Children's Place has an average positive earnings surprise of 36.3% in the trailing four quarters. The stock, with a long-term growth rate of 10.3%, has seen positive estimate revisions in the last 60 days.

Kate Spade, with long-term earnings per share growth rate of 28.3%, has seen positive estimate revisions over the past 30 days.

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