Explaining the Dick’s Sporting Goods’ Selloff

Source: https://www.flickr.com/photos/87250300@N08/

Source: https://www.flickr.com/photos/87250300@N08/

Dick’s Sporting Goods (NYSE:DKS) has long been a favorite store of mine for my outdoor sporting and camping needs. It has a fantastic selection of products. While it may not have the best prices, it continues to be a successful physical retailer as many of its products need to be physically examined, tried on, etc. prior to purchasing, limiting the competition from online retailers. That said, Dick’s has worked to develop its online sales as well.

For those who follow the markets, the selloff in Dick’s Sporting Goods’ stock deserves coverage. Several questions need to be asked. Was the stock overvalued to begin with? Is the sector in a fundamental decline? Is the stock a buy after the selloff? These are just some of the questions investors are asking. The purpose of this article is to help provide insight into these questions by examining Dick’s Sporting Goods most recent quarter, which triggered this massive selloff.

Dick’s Sporting Goods’ stock is down 20 percent this week after the company reported its first-quarter earnings. The company reported consolidated non-generally accepted accounting principles (non-GAAP) net income for the first-quarter of $61.3 million, or $0.50 per diluted share (excluding the sale of certain assets/expenses.) This missed Dick’s own expectations provided on March 11, 2014 of $0.51 to 0.53 per diluted share. Overall, including asset gains and expenses, the company reported consolidated non-GAAP net income of $60.5 million, or $0.48 per diluted share. On a GAAP basis, Dick’s reported consolidated net income for the first-quarter of $70.0 million, or $0.57 per diluted share. It reported consolidated net income of $64.8 million, or $0.52 per diluted share.

Was there any good news? Despite the poor earnings performance, net sales for the first-quarter increased 7.9 percent year-over-year to $1.4 billion. Consolidated same-store sales increased 1.5 percent, although Dicks’ projected an approximate 3 to 4 percent increase. Total same store sales in the first-quarter of 2014 for Dick’s Sporting Goods outlets increased 2.3 percent, while the company’s subsidiary Golf Galaxy decreased 10.4 percent.

I mentioned above that the company has been working to increase its online presence. Internet sales penetration for the quarter was 7.0 percent of total sales, compared to 5.8 percent in the first-quarter of 2013. This is a solid piece of news. In the first-quarter, the company also opened eight new Dick’s Sporting Goods outlets. At the end of the quarter, the company operated 566 Dick’s Sporting Goods stores in 46 states and 79 Golf Galaxy stores in 29 states.

What about the company’s financials? The balance sheet is in decent shape. Dick’s ended the first-quarter with approximately $139 million in cash and cash equivalents as compared to approximately $114 million at the end of the first-quarter of 2013. Furthermore, the company did not have any outstanding borrowings under its $500 million revolving credit facility. Over the course of the past year, the company utilized capital to invest in online growth, repurchase shares, and pay quarterly dividends. Total inventory was 12.8 percent higher at the end of the first-quarter of 2014 as compared to the end of the first-quarter of 2013. The increase in inventory reflects investments in strategic growth categories, new concepts and excess inventory in golf and hunting.

Dick’s also repurchased approximately half a million shares of its common stock at an average cost of $55.44 per share, for a total cost of $25.0 million. To date, the company has repurchased $280.6 million of common stock under its $1 billion share repurchase authorization. The company is also paying a $0.125 dividend in June to common stock holders. Edward W. Stack, Chair and CEO, had this to say about the quarter:

Our difficulties this quarter were isolated to two categories: golf and hunting. After a very challenging first quarter in golf last year, we expected some further headwinds and only modest improvement, but instead we saw a continued significant decline. In the case of hunting, we planned the business down based on last year’s catalysts, but it was even weaker than expected. Despite these challenges, our eCommerce business continued to show exceptional growth and we saw significant strength in several categories in the first-quarter, including women’s and youth athletic apparel, footwear, and team sports.

For the rest of 2014, the company expects the challenges in golf to continue, while hunting sales are anticipated to stabilize and begin returning to normalized levels by the end of the year. As a result, the company revised its full year outlook lower. Given the importance of golf and hunting to the company’s second-quarter, the company expects a disproportionate impact to sales and earnings in the second quarter.

Based on an estimated 124 million diluted shares outstanding, the company currently anticipates reporting consolidated non-GAAP earnings per diluted share of approximately $2.70 to 2.85, excluding a gain on the sale of an asset. This compares to the previous expectation, provided on March 11, 2014, of $3.03 to 3.08 per diluted share. Consolidated same-store sales are currently expected to increase approximately 1 to 3 percent, compared to a 1.9 percent increase in fiscal 2013. This compares to the previous expectation, provided on March 11, 2014, of an approximate 3 to 4 percent increase. The company expects to open approximately 50 new Dick’s Sporting Goods stores, relocate five Dick’s Sporting Goods stores, and remodel five Dick’s Sporting Goods stores in 2014. The company also expects to open approximately eight new Field and Stream stores, relocate two Golf Galaxy stores, and open one new Golf Galaxy store in 2014. Finally, in 2014, the company anticipates capital expenditures to be approximately $360 million on a gross basis and approximately $265 million on a net basis.

In summation, an in-depth look at the quarter reveals why the stock has sold off with such force. Sales are up, but missing expectations. Golf and hunting, two of the most important segments for Dick’s sales, have been incredibly weak. The company has revised its earning lower, and as such the stock even at $45 a share, the stock is still expensive. For those who have purchased at higher levels, I would hold this stock. Under $40, the stock is intriguing. With a strong second quarter, Dick’s could their stock around and reward shareholders. Sales will be in large part dependent on weather. Given its unpredictable nature, it is difficult to project the company’s ability to meet sales guidance.

Disclosure: Christopher F. Davis holds no position in Dick’s Sporting Goods and has no intentions of initiating a position in the next 72 hours. He has a hold rating on the stock and a $42 price target.

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