Dick's Sporting Goods (DKS, Financial) is a sporting goods retailer and operates in same market segment as Cabela’s (CAB, Financial), Big 5 (BGFV), and Hibbet Sports (HIBB). The company owns and operates Golf Galaxy, Field & Stream, and True Runner specialty stores, as well as DICKS.com and golfgalaxy.com ecommerce websites. According to research firm Statista, the athletic goods retail industry will see good growth and this bodes well for all athletic good retailers.
For example, Cabela’s started fiscal 2015 on a strong note and Dick’s first-quarter results were also looking good, though not as good as Cabela’s. Let’s recap the first-quarter fiscal 2015 results and the journey ahead.
First quarter recap
Dick’s Golf Galaxy stores performance is weighing down heavily on the company’s performance. For example, in the first-quarter fiscal 2015, the comparable-store sales, or comps, at Golf Galaxy nosedived 11% year-over-year. It was on the back of strong performance of the ecommerce channel and 1.8% year over year comps growth at Dick’s Sporting Goods stores that the company managed consolidated comps growth of 1% year over year. This came within the guided range but was below analysts’ estimates and was enough to spook the investors.
Consolidated sales came in at $1,565.3 million, on the back of new store openings and robust performance of the ecommerce channel. This was 8.8% more than the year-ago quarter. Analysts were expecting $10 million less, so the company fared well on top-line expectations.
Gross profit moved up 6.4% year-over-year to $469 million, but gross margin contracted 68 basis points to around 30%. Contraction in gross profit margin shaved off 128 bps from operating margin, which came in at 6.5%. As a result, earnings came in at $0.53 per share representing 6% year-over-year growth. The EPS managed to be at high end of the company’s guided range, but failed to beat analysts’ expectations.
Dick’s exited the first quarter with cash and cash equivalents of $81.4 million, shareholders’ equity of $1,743.1 million, and outstanding borrowings of around $51 million under its revolving credit facility.
New stores to drive growth
During the recently reported quarter, Dick’s opened nine namesake stores and one Field & Stream store. The total stores tally as at the end of the quarter stood at 612 DICK'S Sporting Goods stores, 78 Golf Galaxy stores, and 11 Field & Stream stores. These new stores will drive top-line growth in the long run.
Dick’s is also toying with the idea of combo stores, the first of which is scheduled to open in July. This will have Dick’s and Field & Stream right next to each other with the interior walls opened up in the middle of the store, so customers can cross-shop between the two. The sporting goods retailer plans to add four of these combo-stores by end of fiscal 2015 and feels that cross-shopping will lead to growth in the long run. Also, the company plans to open 45 DICK’S Sporting Goods and around 9 Field & Stream stores in fiscal 2015 to boost the top-line growth further.
Taking complete control of its ecommerce channel
Omni-channel is becoming a key growth driver for brick-and-mortar store retailers, and hence they want full control over the entire logistics. As a result, Dick’s decided to move away from eBay enterprise and take the destiny of its ecommerce channel into its own hand. This shouldn’t come as a surprise as earlier Target (TGT) had also done this while it moved away from Amazon (AMZ).
The sporting goods retailer is planning to move its primary site to its own platform by January of 2017. In addition, the company has re-launched its GolfGalaxy.com site. On ecommerce plans, Dick's CEO Ed Stack said:
“Our focus on e-commerce continues to pay off, with e-commerce penetration growing to 8.5% of sales in the first quarter of this year, compared to 7% in the first quarter of 2014. We have significantly outpaced the market, and have picked up market share in the online space. We moved up to number 70 on the internet retailer top 500 list in 2014, and we grew at nearly twice the pace of the industry.”
Wrapping up
Dick’s is making all the right moves to sustain the growth momentum in the long run. The company has plans for bolstering its omni-channel capabilities and moving away from eBay will let it expand margins as it will no longer have to pay charges as a percentage of sales, as the costs will be static. Therefore, sales of higher priced items will trickle down to the bottom line. In fact, the company now expects the earnings to be in the range of $3.12–$3.20 per share versus $3.10–$3.20 expected earlier.
However, analysts are not very optimistic as evident from earnings revision history during the past 30 days. But, these revision trends can quickly reverse with just one good or bad quarter, as analysts tend to align their estimates based on market sentiments. So, I would not read too much into this.
For the next five years, growth is pegged at a CAGR of 13.8%. Year-to-date stock has gained around 8% and at a forward P/E of 15.20 it is a good investment for the long run.
