Dick's Posts Solid 1Q

Dick's Sporting Goods Inc.’s (DKS - Analyst Report), a full-line sporting goods retailer, first-quarter 2012 adjusted earnings per share jumped 50% to 45 cents a share from the year-ago level of 30 cents a share, surpassing the company’s guidance range of 36 – 38 cents per share. Earnings per share also topped the Zacks Consensus Estimate by 7 cents per share.

Solid results in the quarter were mainly driven by increased sales resulting from opening of new stores, better-than-expected comps and improved margins.

An increase of 8.4% in consolidated comparable-store sales (comps) and opening of new stores aided the 15.1% growth in net sales during the quarter. Net sales jumped to $1,281.7 million from $1,113.8 million in the year-ago quarter. Total revenue also surpassed the Zacks Consensus Estimate of $1,232.0 million.

The 8.4% comps growth in the quarter spiked substantially from the company’s March 2012 guidance range of 3%-4%. The increase in comps was driven by a 7.3% rise in Dick's Sporting Goods store sales, 12.6% increase in Golf Galaxy store sales and a 33.4% growth in e-commerce business.

First quarter gross profit came in at $394.6 million, up 19.4% year over year, with gross margin expanding 110 basis points to 30.8%. Adjusted EBITDA in the quarter increased 34.7% year over year to $125.3 million, with EBITDA margin expanding 150 basis points to 9.8%.

Financial Aspects

Dick’s ended the first quarter of fiscal 2012 with cash and cash equivalents of $521.0 million, shareholders’ equity of $1,596.2 million and no borrowing outstanding under its credit facility. The company incurred net capital expenditures of $41.3 million in the first quarter of fiscal 2012. Inventory per square foot during the quarter spiked 6.6% compared to the year-ago quarter.

Dividend and Share Repurchase

Dick’s Sporting has always been committed to create value to its shareholders by returning capital in the form of dividends. To improve shareholders’ wealth, the company has recently declared a quarterly dividend of 1.25 cents per share, payable on June 29, 2012 to shareholders of record as of June 1, 2012.

In January 2012, Dick’s approved a $200 million share repurchase program spanning over the next 12 months. With this program, the company aims to reduce the number of shares outstanding in 2012, which is expected to rise from the exercise of a substantial number of stock options issued following the company's 2002 initial public offering. These stocks options, which are set to expire in 2013, carry an option to be exercised in 2012, resulting in the issuance of additional shares.

During the first quarter of 2012, the company bought back nearly 2.1 million shares, at an average price of $49.39 per share. This brings the company’s total share repurchase cost for the period to about $104 million.

Subsequent to the first quarter, the company bought back the remaining authorization available under the $200 million program on May 14, 2012. Therefore, the company bought back a total of nearly 4.1 million shares at an average price of $49.33 per share, for total company cost of $200 million. The company fully funded the repurchase from its available cash on hand.

Store Update

In the reported quarter, Dick’s opened six Dick's Sporting Goods stores, bringing the Dick's Sporting Goods stores total to 486 stores in 44 states. Additionally, the company operated 81 Golf Galaxy stores in 30 states at quarter end.

Guidance

For the second quarter of fiscal 2012, Dick’s expects earnings per share to be between 62 cents and 63 cents and comps to rise in the band of 2%-3%. In the second quarter, Dick’s plans to further expand its stores network by opening four more Dick's Sporting Goods stores.

For fiscal 2012, management expects earnings in the range of $2.45 to $2.48 per share, while comps are expected to increase in the 3%-4% range. Store openings for fiscal 2012 are expected to be approximately 40 Dick's Sporting Goods stores. Moreover, the company also plans to relocate about five Dick’s Sporting Goods stores and two Golf Galaxy stores in 2012.

For 2012, the company expects to incur capital expenditures of $241 million on a gross basis and $190 million on a net basis.

Our Take

Pittsburgh-based Dick's Sporting Goods remains the dominant player in the industry with significant store expansion and potential share gain opportunities in the U.S. The company’s outlook for 2012 looks bright given the company’s continued investments in new stores and e-commerce business as well as in practices that drive margin expansion including inventory management, private brands, and product mix shift.

However, the sporting goods market is highly competitive in nature and Dick’s failure to compete effectively in terms of price, quality or product will thwart its growth potential. The company faces stiff competition from Foot Locker Inc. (FL - Snapshot Report) and Wal-Mart Stores Inc. (WMT - Analyst Report). Moreover, a weak economy will likely continue to weigh on the company’s profitability in the long term.

Dick's Sporting Goods currently has a short-term Zacks #2 Rank (Buy). We maintain our long-term ‘Neutral’ recommendation on the stock.