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The Science of Hitting
The Science of Hitting
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Dick's Sporting Goods - Q3 2011 Results

November 15, 2011 | About:
Dick’s Sporting Goods (DKS), the No. 1 retailer in the sporting goods industry, held a conference call on Tuesday morning to discuss third quarter 2011 results. Here’s a recap from the second quarter results, which I covered in a previous article:

“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, 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).

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 net income in the second quarter of 2010 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.”

Here are some of the highlights from the third quarter release and the conference call:

Net sales for the third quarter increased 9.3% to $1.2 billion, largely due to a 4.1% increase in consolidated same store sales and the opening of new stores (19 in the quarter). The 4.1% same store sales increase was split across the business, with a 3.8% increase at Dick’s Sporting Goods stores (4.8% increase in ticket, 1% decline in traffic), a 2.4% increase at Golf Galaxy stores and a 16.8% increase in e-commerce.

Consolidated gross profit in the quarter was $350.6 million, or 29.72% of sales, an increase of 126 basis points year over year; this increase was driven primarily by an increase in merchandise margin, particularly more efficient inventory management (47 basis points), and increased occupancy leverage (79 basis points).

Consolidated non-GAAP diluted EPS was $0.32 in the quarter ($0.33 on a GAAP basis due to partial reversal of litigation settlement costs), an increase of 45% from the $0.22 reported in Q3 2010 ($0.14 in Q3 2010 on a GAAP basis due to Golf Galaxy store closure costs).

Through the first nine months of the year, the company reported consolidated non-GAAP net income of $142.8 million ($1.14 per diluted share), compared to $104.4 million ($0.86) on a non-GAAP basis through the first three quarters of 2010; as a result of the strong performance, the company raised their full year guidance yet again, this time bumping it up from (non-GAAP) $1.94-$1.96 to $2.01-$2.03.

In addition to the strong quarter, management announced something else that may interest investors in a period of non-existent yield - the company’s first ever dividend payment:

“This morning we also announced that our Board has declared an annual cash dividend for 2011 of $0.50 per share. The dividend will be payable on December 28 to shareholders of record as of December 7. Our current expectation is to pay quarterly dividends going forward subject to Board approval in each case. We believe we can return value to the shareholders through a dividend while still investing in profitable growth opportunities.”

On the day, the stock was nearly 5% higher, and has gained more than 25% over the past three months; at $41 per share, DKS currently trades at roughly 20 times management’s 2011 non-GAAP EPS target.

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 (potentially over a period of years). As this would suggest, I run a fairly concentrated portfolio by most standards, usually with the majority of the value in a handful of names; from the perspective of a businessman, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I 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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