Dick's Sporting Goods Inc. (DKS, Financial) released decent fourth-quarter earnings results in March, beating analysts' expectation for revenue and profitability. The company also hiked its quarterly dividend by 10%.
This good news has pushed its share price much higher. Since the beginning of the year, its share price has surged nearly 54%. Despite these positive developments, I believe the retailer is currently overvalued, so investors might consider waiting for a more attractive price before initiating a long position.
Growing revenue with consistent operating profitability
Dick's Sporting Goods is one of the leading retailers of sporting products, including equipment, apparel, footwear and accessories. It is currently operating 853 stores across the U.S. Of around 1,500 suppliers, Nike Inc. (NKE, Financial) is the largest, accounting for 23% of its total purchases. For logistics, the company has five regional distribution centers to manage its inventory and distribute its merchandises directly to stores.
Over the past decade, Dick's Sporting Goods has been able to consistently grow revenue, from $6.20 billion in 2013 to nearly $13 billion in 2023. Its operating income has been consistently positive, fluctuating in the range of $375.60 million to $2 billion over the same period. In 2023, operating income came in at $1.28 billion.
In the fourth quarter, the company produced $3.88 billion in sales, 7.80% higher than the same period last year and beating analysts' estimates by $90 million. Its earnings per share were $3.85, up from $2.93 in the prior-year quarter and surpassing consensus expectations by 49 cents.
The comparable store sales growth was 2.80% for the quarter and 2.4% for full fiscal 2023. The company's management is quite optimistic about the 2024 outlook, with continued growth in sales and earnings. They anticipate its comparable store sales growth will be in the range of 1% to 2%, while earnings per share are expected to stay between $12.85 and $13.25.
Positive cash flow generation
What I like about Dick's Sporting Goods is it has been consistently generating positive operating cash flow and free cash flow. Over the past 10 years, its operating cash flow has stayed the range of $404 million to $1.62 billion, while free cash flow has fluctuated between $118.20 million and $1.33 billion. In 2023, it generated nearly $1.53 billion in operating cash flow and $940 million in free cash flow.
Decent balance sheet strength
Dick's Sporting Goods has strong balance sheet. As of February, it reported nearly $2.62 billion in shareholders' equity and $1.80 billion in cash and cash equivalents. The total debt, including interest-bearing debt and operating lease liabilities, came in at $4.26 billion. At first look, the debt-to-equity ratio seemed to be high at 1.63, primarily due to modest shareholders' equity. This modest level of shareholders' equity was the result of extensive share buybacks, which have been conducted by the company over the years. The treasury stocks, acting as a deduction from shareholders' equity, reached more than $4.42 billion.
Taking a closer look, the maturities of the obligations are spread out over time. The $1.48 billion in long-term debt will not be due until 2032 and 2052, while the average maturities of operating lease liabilities were in the range of only $312 million to $681 million. Consequently, given its current cash position and operating cash generation abilities, I believe Dick's Sporting Goods is in a comfortable position to settle its operating lease liabilities and long-term debt.
Source: Dick's Sporting Goods' 10-K filing
Returning cash to shareholders
Dick's Sporting Goods has demonstrated a strong commitment to returning cash to shareholders through dividend payments and share buybacks. Since 2012, the company has been aggressively repurchasing shares, reducing its total shares outstanding by nearly 32% from 126 million shares to just 86 million shares. On the other hand, it has also consistently increased the dividend per share from 50 cents to $4.40, with the compounded annual growth rate of 21.86%.
In 2023, Dick's Sporting Goods has returned $1 billion to its shareholders, including $649 million in share repurchases and $351 million in dividend payments. Consequently, the total cash return yield has reached 5.44% based on the current share price.
Already overvalued
Analysts forecast that by 2025, Dick's Sporting Goods' revenue could grow to $13.70 billion. Assuming an operating margin of 10%, the company's operating income is projected to hit $1.37 billion. With an earnings yield of 10%, equivalent to an earnings multiple of 10, its enterprise value is estimated to reach $13.7 billion. After accounting for a net debt of $2.5 billion, its equity value is expected to be $11.2 billion. If the total number of outstanding shares decreases by 10% to 77.4 million shares, due to the continued share repurchases, the intrinsic value of Dick's Sporting Goods would be approximately $145 per share, 35% lower than the current share price.
The bottom line
Dick's Sporting Goods reported strong financial results in the fourth quarter, with its revenue and earnings exceeding analysts' expectations. Additionally, the company increased its dividend, leading to a significant rise in its stock price.
Over the past decade, the company has consistently grown its revenue, produced consistent operating income and maintained solid balance sheet strength to comfortably settle debt and lease payments. However, my analysis has shown that, despite the positive outlook for 2024, the stock might be quite overvalued currently.
