Dick’s Sporting Goods (NYSE:DKS), the No. 1 retailer in the sporting goods industry, held a conference call on Tuesday morning to discuss second quarter 2011 results. The company is currently facing a weak consumer that is putting off discretionary spending whenever possible, suggesting that golf clubs and fishing poles might not be flying off the shelves (proved to be right to some extent — outdoor categories did poorly and were off mid single digits; however, management says it was largely “self-inflicted”). Here are some of the highlights from the Q&A and major developments that are occurring at Dick’s:
Sales for the quarter increased 6.6% to $1.3 billion, driven by a mix of new stores (eight new locations added in the quarter) and 2.5% same store sales growth over the same period in 2010. The same store sales increase was split between a 1.7% increase at Dick’s Sporting Goods stores (+2.5% ticket, -0.8% traffic), a 4.0% increase at the company’s Golf Galaxy stores, and a 31.9% increase in e-commerce sales.
As noted by CEO Ed Stack on the call, the company still believes that there is plenty of organic growth for Dick’s in the United States: “On the store network front, we have always taken a research intensive approach regularly conducting in-depth studies on our industry, consumer demands and regional demographics to identify our growth potential. Our research indicates that we can organically double the size of our Dick’s Sporting Goods store network to at least 900 stores nationwide over time (currently operating 455 stores), without the need for an acquisition.”
In 2011, the company still expects to open 36 new stores (8% growth rate), with plans to accelerate that pace in 2012 and 2013. However, as anybody who follows Dick’s can attest, they will not simply push through new stores for the sake of growth; they will only expand when it fits within their disciplined real estate strategy (quite a bit different from the old Starbucks model).
Gross profit was 30.69% of sales, or 132 basis points higher than the second quarter of 2010. In addition, SG&A decreased 26 basis points (as a percentage of sales) to 21.87%.
The company reported consolidated non-GAAP net income for the second quarter ended July 30, 2011 of $65.1 million, or $0.52 per diluted share (the difference being that GAAP earnings included $0.07 of gain from sale on investment). This compares to second quarter 2010, the Company reported consolidated net income of $51.5 million, or $0.43 per diluted share, a 21% increase in EPS year over year. For the full year, management upped guidance to a range of $1.94-$1.96, from a previous estimate of $1.91-$1.93.
The company has a strong balance sheet, with nearly $630 million in cash and equivalents and no outstanding borrowings. After backing out the more than $600 million in net cash (roughly $5 a share), the company is trading at less than 15 times 2011 estimates; to give that number some meaning, consider the fact that through 2010, the five-year CAGR of net income from continuing operations was greater than 20%. This valuation can partly be explained by concerns from a significant increase in direct-to-consumer sales from names like Under Armour and Nike, along with headwinds in the back half of the year from strong comps (coming off an 8% increase in fourth quarter 2010).
The stock fell off a cliff when trading started, hitting a low of nearly $31 a share (more than 5% off the open); by the end of the day, the stock closed at $32.78, less than half a percent below Monday’s close. With 8% comps coming up in the fourth quarter, the company certainly has headwinds from a weak economy and consumer, partly due to significant uncertainty; it should be interesting to see how DKS handles the back half of the year.
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As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.