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Dick's Sporting Goods: Retail Conference Notes

September 08, 2011 | About:
The Science of Hitting

The Science of Hitting

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Dick’s Sporting Goods (DKS), the No. 1 retailer in the sporting goods industry, participated in Goldman Sachs Global Retailing Conference on Wednesday. I covered the company’s earnings release with an article on August 16; as a refresher, here were some of the highlights:

“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 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 of GSI Commerce, which was acquired by eBay). 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 15x 2011 estimates.”

As I noted then, the company is attractive on a historical PEG basis; here are some of the highlights from the retailing conference the comments made by CEO Ed Stack and CFO Tim Kullman:

As management has stated previously, they see three main drivers to enhancing profitability looking forward: store expansion, e-commerce, and margin acceleration.

To touch a bit on each, management had this to say about store expansion in August: “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.”

On the second point, sales in e-commerce, which is currently 2-3% of sales, increased nearly 32% in Q2 (58 basis points of the same store sales increase of 2.5%); this is an indication of strong growth and future potential in this segment, especially considering the current economic environment for discretionary spending like sporting goods.

On the final point (margin acceleration), the focus is on efficient inventory management (“best it’s ever been”, down 0.9% on a square foot basis in the most recent quarter), higher private brand sales penetration (goal is 20% of sales), and an increased focused on regionalization, among other things.

They believe these three items combined will help them to reach double digit operating margins in the next 3-5 years, from 6.91% last year and 5.34% in 2009.

In regards to long run category drivers, Mr. Stack touched on the company’s focus on the core athlete and the outdoor enthusiast (for example, Dick’s is the largest employer of PGA professionals, which puts knowledgeable staff in stores to help customers find the products they need) . Mr. Stack noted that in particular, the footwear business has performed strongly as of late due a focus on this dynamic of the product offerings in the store; looking forward, he thinks that this segment can grow faster than the company as a whole.

In regards to the regional evolution of the business on the West Coast (where they purchased 14 Chick’s Sporting Goods stores in May 2009), management noted weakness in Los Angeles, but strength in other parts of the state, like Northern California, which is doing “very well.”

In regards to uses of cash (more than half a billion dollars in the bank accounts) outside of store expansion, Mr. Stack listed his priorities (from most likely to lease likely) as such: build-out store size, remodel stores, increase the dividend, and buyback shares. In essence, he sees no reason to hand cash back to shareholders when there are opportunities to reinvest cash in new stores at an attractive rate of return.

Since August 16 (the day after the earnings release), the stock is relatively flat (up less than 1% after accounting for today’s 3% drop).

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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