On Tuesday, shares of Dick’s Sporting Goods Inc. (DKS, Financial) soared over 10% on the news that the company is more than doubling its dividend after a better-than-expected fourth-quarter 2022 earnings report and an increase in its guidance for fiscal 2023. This means the retailer will soon offer twice its current dividend yield of 1.34%, putting it back in competitive territory for income investors despite the share price having doubled since June 2022.
Doubling its share price and dividend amid such a difficult macroeconomic environment is truly an incredible feat for any company. The positive fourth-quarter results may have been boosted by the holiday season, but the guidance increase and dividend hike suggest the company is expecting more enduring business gains.
So the big question for investors is, how did Dick’s Sporting Goods do it? More importantly, can it keep up this performance?
Dick’s thrashes retail sector
Overall, U.S. retail sales grew just 3.9% in 2022 according to data from the Census Bureau. Factoring in inflation, which was 6.5% in 2022, retail sales actually declined by 2.6% for the year.
When we look at the near-term numbers, Dick’s actually failed to stack up to the overall retail sector with year-over-year sales growth of just 0.6% in full-year 2022. On top of that, earnings per share was down 18% compared to fiscal 2021.
However, when we zoom out to the past three years, we begin to see where Dick’s has outperformed its peers. The company has a three-year revenue per share growth rate of 9.5% and a three-year earnings per share without non-recurring items growth rate of 62.4%, outperforming 69% and 87% of retail sector peers, respectively.
While Dick’s has reported solid earnings growth compared to the overall retail sector, we also need to compare it more closely to fellow sporting goods companies. As shown in the chart below, fellow pure-play sporting goods retailers Hibbett (HIBB, Financial) and Academy Sports and Outdoors (ASO, Financial) have shown similar growth numbers.
While comparable to direct competitors on a growth basis, Dick’s is the clear winner in terms of shareholder returns as it has raised its dividend from $1.95 per year to $4 per year. Hibbett’s dividend hovers around Dick’s previous level, and Academy’s dividend is negligible at just 0.5%. Dick’s also has a three-year share buyback ratio of 6.9%, which is lower than Hibbett’s 10.1% but higher than Academy’s -3.5%.
Opportunistic investments
Given the time frame of when Dick’s and its competitors began to grow rapidly, it is clear that sporting goods came in high demand due to the pandemic. There was a fundamental shift in recreation in favor of outdoor and sports activities, and it seems that trend is sticking around even now that Covid cases are less common.
The company was quick to seize the opportunity the market presented it with, borrowing a substantial amount of money not only to survive the initial brick-and-mortar drawdown in 2020, but also to invest in growth at precisely the right time.
Aggressive investments in e-commerce helped sustain the sporting goods retailer through the early days of the pandemic, and when business began picking back up, the company leveraged the favorable market situation to strengthen its partnerships with brands and improve its margins.
Dick’s credits its wide variety of curated brands and products with helping to drive its success, as it offers items for a broad range of interests and price points. E-commerce and omnichannel growth has helped boost growth in this regard as these sales channels allow the company to sell more than just what is already in stock at a specific retail location.
The sporting goods space benefits from a powerful brand value effect as customers tend to place a lot of trust in brands for equipment such as running shoes, tennis rackets, boats, fishing and camping equipment, etc. On the other hand, customers may be more likely to look for cheaper alternatives when it comes to apparel or home goods, as these spaces do not have the mentality of “I might lose the competition if I use the wrong equipment.”
Valuation and takeaway
Many of the pandemic-related growth trends have faded, but based on Dick’s updated outlook, the company is not currently expecting that to be the case. It forecasts fiscal 2023 earnings per share to be between $12.90 and $13.80, which would be lower than the fiscal 2021 number of $13.87 at the midpoint but higher than fiscal 2022’s $10.78.
While this certainly does not represent bottom-line growth compared to fiscal 2021, it does represent an expectation of a sustained demand situation. The price-earnings ratio of 12.96 is low, but perhaps not too low if we factor in the possibility of zero or little earnings growth for the third year in a row in fiscal 2024.
According to the GuruFocus discounted cash flow calculator, Dick’s would only need to grow its earnings per share by an average of 5.6% per year for the next decade to be considered fairly valued at its current share price.
Overall, Dick’s looks fairly valued when we consider its rapid growth for the past few years, the prospect of stability in the years to come and the recent dividend hike. Raising the dividend now seems like a prudent move if the company is expecting growth opportunities to dry up in the near term. Valuation multiples could compress on subsequent no-growth years, but this effect should not be too steep given that the company’s price-earnings ratio is not sky high to begin with.
