Dick’s Sporting Goods (DKS, Financial), the $3 billion sporting goods retailer recently suffered a hefty share price decline, about (-)23%, after reporting its second-quarter results.
In review, the company reported an actual increase of 9.8% in revenue compared to a year earlier to $3.98 billion and a better 15% profit growth to $170.6 million resulting in a 4.3% margin compared to 4.1% last year.
In addition, the sports goods retailer also provided its fiscal year 2018 guidance. Among its figures provided were its target earnings per share (EPS) in the range of $2.85 to $3.05 compared to $2.56 in fiscal year 2017.
"In this very competitive and dynamic marketplace, we were able to deliver a significant increase in our bottom line from last year. We continued to capture market share and generated strong results in e-Commerce, footwear and golf, although sales were pressured by weakness in hunting, licensed and athletic apparel.
"By design, we will be more promotional and increase our marketing efforts for the remainder of the year, as we will aggressively protect our market share. We have updated our outlook to reflect these investments. We continue to believe retail disruption creates opportunities for us as we look long term."Â –Â Edward W. Stack, chairman and CEO
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Valuations
Dick’s Sporting Goods is undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 9.9 times vs. the industry median of 20.3 times, a price-book (P/B) ratio of 1.6 times vs. 1.67 times and a price-sales (P/S) ratio of 0.38 times vs. 0.7 times.
The company also had a trailing 2.31% dividend yield with 24% payout ratio.
Average revenue and EPS estimates for the coming fiscal year indicated forward multiples 0.4 times and 9 times – about half of its three-year averages.
Total returns
Dick’s Sporting Goods failed to please any of its investors so far this year after having provided total losses of (-)47.19% compared to the Standard & Poor's 500 index’s 11.68%.
Dick’s Sporting Goods
According to filings, Dick’s Sporting Goods was incorporated in 1948 in New York under the name Dick's Clothing and Sporting Goods Inc. In November 1997, the company re-incorporated as a Delaware corporation and in April 1999 changed its name to Dick's Sporting Goods Inc.
Dick's Sporting Goods (together with its subsidiaries) is a leading omnichannel sporting goods retailer offering an extensive assortment of authentic, high-quality sports equipment, apparel, footwear and accessories through a blend of dedicated associates, in-store services and unique specialty shop-in-shops.
The company also owns and operates Golf Galaxy, Field & Stream and other specialty concept stores, and Dick's TeamSports HQ, an all-in-one youth sports digital platform offering free league management services, mobile apps for scheduling, communications and live scorekeeping, custom uniforms and FanWear and access to donations and sponsorships.
Dick's Sporting Goods offers its products through a content-rich eCommerce platform that is integrated with its store network and provides customers with the convenience and expertise of a 24-hourstorefront.
As of July 29 the company operated 704 Dick's Sporting Goods stores in 47 states, with approximately 37.4 million square feet, 98 Golf Galaxy stores in 32 states, with approximately 2.1 million square feet, and 29 Field & Stream stores in 14 states, with approximately 1.4 million square feet.
The company purchases merchandise from approximately 1,400 vendors. In fiscal year 2016, Nike (NKE, Financial) and Under Armour (UA, Financial)(UAA, Financial), was Dick’s Sporting Goods’ largest vendors, having represented approximately 20% and 12% of its merchandise purchases.
Further, Dick's Sporting Goods business is largely seasonal based on sports seasons and the holiday selling season. Meanwhile, the majority of Dick's Sporting Goods stores are located in the eastern half of the U.S., which exposes the company to various regional risks, including those relating to weather conditions.
The company only has one reportable segment albeit net sales can still be categorized into Hardlines (45% of 2016 sales), Apparel (35%), Footwear (19%) and Other (1%).
Hardline includes items such as sporting goods equipment, fitness equipment, golf equipment and hunting and fishing gear while Other includes the company's nonmerchandise sales categories, including in-store services and shipping revenues.
Sales and profits
In the past three years, Dick’s Sporting Goods registered 8.4% revenue growth average, (-)5.23% profit decline average and a profit margin average of 4.4%.
Cash, debt and book value
As of July, Dick’s Sporting Goods had $131.6 million in cash and cash equivalents and $191.8 million in debt with debt-equity ratio 0.1 times compared to 0.09 times a year earlier. Overall debt increased by $34.2 million year over year while equity rose by $91.7 million.
Of Dick’s Sporting Goods $4.4 billion assets 8.7%Â were identified as goodwill and intangibles while book value rose 5% year over year to $1.92 billion.
Cash flow
In the first half, Dick’s Sporting Goods cash flow from operations increased by 6% from a year earlier to $244.5 million brought by higher profits, depreciation and amortization, deferred income taxes and accounts payable.
Capital expenditures were $235.7 million leaving the company with $8.8 million in free cash flow compared to $22.2 million in the same period last year. Interestingly, Dick’s Sporting Goods handed out a total of $203.7 million or 23.2 times its free cash flow in dividends and share repurchases while having raised $153.8 million in borrowings net repayments.
The cash flow summary
In the past three years, Dick’s Sporting Goods allocated $1.14 billion, raised $71 million in debt (net repayments and other financing activities), generated $867 million in free cash flow, and provided $897 million in shareholder payouts at a free cash flow payout average of 107%.
Conclusion
As it turned out, the inconsiderate market poorly treated Dick’s Sporting Goods’ after the company reported its first-half results. In a rare occasion, high revenue and even higher profit growth figures did not reflect a higher company’s share price as a result. Meanwhile, average analyst estimates indicated flat revenue growth and a high 20%-plus EPS growth for this coming fiscal year vs. three-year average of (-)1.64%.
In addition to the solid business growth, Dick’s Sporting Goods carried a strong balance sheet with minimal debt and blue sky elements (goodwill and intangibles). The company also has maintained hefty payouts to its shareholders in recent years and even going beyond its free cash flow generation.
Average analysts have a hold recommendation on Dick’s Sporting Goods with a target price of $32.4 per share vs. $27.79 at the time of writing. Using analysts revenue estimates multiplied with three-year P/S average with a 15% margin indicated a per share figure of $45.86.
In summary, Dick’s Sporting Goods is a buy with $32 target price.
Disclosure: I do not have shares in any of the companies mentioned.
