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DICK'S Sporting (DKS) Q4 Mixed: Earnings Beat but Sales Lag

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DICK'S Sporting Goods, Inc. (DKS - Free Report) reported better-than-expected earnings results for fourth-quarter fiscal 2017 while the top line lagged estimates and margins continued to be strained. This marked the second straight positive earnings surprise, while it topped estimates for the sixth time in the last eight quarters. However, the sales miss came after a beat recorded in the preceding two quarters.

Notably, the mixed results did not have much impact on the stock’s performance on Mar 13. However, this Zacks Rank #3 (Hold) stock has surged 13.6% in the last three months, against the industry’s decline of 1.3%.



Q4 Highlights

DICK’S Sporting posted adjusted earnings of $1.22 per share in the fiscal fourth quarter, surpassing the Zacks Consensus Estimate of $1.20. Also, it was near the high-end of the guidance of $1.12-$1.24. However, earnings declined 7.6% from the year-ago quarter. On a GAAP basis, the bottom line improved 37% to $1.11 per share. Reported earnings were within the company’s guidance of $1.05-$1.17 per share.

DICK'S Sporting Goods, Inc. Price, Consensus and EPS Surprise

DICK'S Sporting Goods, Inc. Price, Consensus and EPS Surprise | DICK'S Sporting Goods, Inc. Quote

Net sales of $2,664.1 million lagged the Zacks Consensus Estimate of $2,732 million but grew 7.3% from the prior-year quarter. Consolidated comps declined 2% compared with the company’s forecast of a low single-digit decline.

The comps decrease was due to a 2% decline in ticket owing to a promotional environment, while transactions remained flat. Further, results gained from solid e-commerce growth, which increased 9% year over year, driven by the company’s first successful holiday season on the new web platform. Moreover, e-commerce penetration improved to 19% of net sales from 17.9% in the prior-year quarter.

During the reported quarter Team Sports, footwear and outdoor-equipment business were the best performers, followed by a decent show put up by private brands that reported double-digit comps growth and improved margin rates. However, sales remained soft at the hunting and electronic categories while the apparel segment reported flat comps.

Delving Deeper

Gross margin contracted 130 basis points (bps) to 29.6%. This reduction stemmed from lower merchandise margins amid a highly promotional backdrop as well as elevated shipping and fulfillment expenses, as a percentage of sales, due to the growth of e-commerce business.

Further, adjusted SG&A expenses deleveraged 69 bps, owing to higher store payroll expenses, partly offset by the new e-commerce operating model and lower incentive compensation.

Adjusted operating income (EBIT) dipped 15.9% to $198.4 million, while the operating margin contracted 205 bps to 7.5%, mainly due to lower gross margin and expense deleverage.

Financial Aspects

DICK’S Sporting ended fiscal 2017 with cash and cash equivalents of $101.3 million and total shareholders’ equity of $1,941.5 million. Furthermore, the company had no outstanding borrowings under its revolving credit facility as of Feb 3, 2018.

In the past year, the company was consistent with its investments in e-commerce, while it returned more than $357 million to shareholders in the form of dividends and share repurchases.

As of Feb 3, 2018, DICK’S Sporting generated roughly $746.3 million cash from operating activities. Total inventory at the end of the quarter grew 4.4% on a year-over-year basis, while total capital expenditures during the quarter amounted to nearly $474.3 million (on a gross basis) and $372.6 million (on a net basis).

Dividend and Share Repurchases

DICK’S Sporting has always created value for shareholders by returning capital in forms of dividends and share repurchases. In fiscal 2017, the company paid dividends worth nearly $73.1 million and repurchased nearly 8.1 million shares for a total cost of $384.6 million. Following this, the company has shares worth nearly $800 million, remaining under its standing authorization that extends through 2021.

On Feb 12, management announced a quarterly cash dividend of 22.5 cents per share, reflecting a 32% growth from the prior dividend rate. The raised dividend is payable on Mar 30 to shareholders of record as of Mar 9, 2018.

Store Update

During the reported quarter, the company relocated one namesake store, while it shut down three namesakes and four Golf Galaxy outlets. These actions took the total store count, as of Feb 3, 2018, to 716 DICK'S Sporting Goods stores across 47 states, 94 Golf Galaxy stores in 32 states and 35 Field & Stream stores in 16 states.

Guidance

DICK’S Sporting remains pleased with the progress made on key priorities in 2017. Consequently, the company delivered more than one billion dollars in sales for both online and private brand businesses. Going into 2018, the company expects greater product innovation from its key partners and plans to further expand its private brands business, which should lower margin pressures than previously anticipated.

Further, the company plans to make significant investments in its business as it remains confident of the long-term potential and sees tremendous opportunities in the evolving industry. The company will continue to focus on executional excellence and further enhancement of omni-channel capabilities.

While the company’s investments are anticipated to strengthen its business in the long term, it is likely to thwart the company’s earnings in the near term.

Further, the company announced that it has discontinued the practice of providing quarterly guidance and will provide only annual guidance henceforth, establishing a sync with the industry practice. For fiscal 2018, management projects earnings of nearly $2.83 per share, while comps are estimated to be flat to down low single-digit. The company’s guidance for fiscal 2018 includes the impact of the recent changes made to the firearm policies.

Notably, the company’s hunting and firearm, as well as electronics businesses, is likely to be a headwind throughout 2018. The hunting and firearm business will continue to be impacted by the recent changes in firearm policies, while the electronics business will be hurt by reduced exposure to this business.

While innovations and growth of private brands are likely to lower margin pressures, the company still anticipates margins to remain negative. Consolidated operating margins are expected to decrease year over year in fiscal 2018 due to SG&A deleverage. SG&A expenses are expected to increase due to higher investments in its business and the restoration of incentive compensation to historic levels.

However, the company expects gross margin to reflect only a marginal decline due to improved product innovation cycle and a better balance of inventory in the supply chain. Further, pre-opening expenses are likely to decline due to a significant reduction in new store openings in fiscal 2018.

Net capital expenditures for the fiscal are anticipated to be about $250 million while gross capital expenditures are anticipated to be nearly $280 million. Capital expenditures for fiscal 2018 will be mostly directed toward investments in technology and e-commerce fulfillment.

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MarineMax gained 29.6% in the last six months. Moreover, it has a long-term earnings growth rate of 30%.

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Michaels Companies, with a long-term earnings growth rate of 12%, delivered an average positive earnings surprise of 4.9% in the trailing four quarters.

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