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Dick's Sporting Goods Impresses Again

DKS HIBB

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Full-line sporting goods retailer, Dick's Sporting Goods Inc.’s (DKS - Analyst Report) third-quarter 2012 earnings per share jumped 25% from the year-ago level to 40 cents a share, moving past the company’s guidance of 36 cents per share. Earnings per share also beat the Zacks Consensus Estimate of 37 cents. The results exceeded the Zacks Consensus Estimates for the fourth straight quarter.

The strong quarterly performance boosted investor sentiments, which reflected on the company’s share price. The company’s share price closed 4.66% higher at $50.97 on November 13, 2012, from the previous day’s closing price of $48.70.

During the quarter, net sales grew 11.2% to $1.312 billion driven by a 5.1% rise in consolidated comparable-store sales (comps) and opening of new stores. Total revenue also surpassed the Zacks Consensus Estimate of $1.296 billion.

The increase in comps was aided by a 3.9% rise in Dick's Sporting Goods store sales, 2.3% increase in Golf Galaxy store sales and a 46.7% growth in the e-commerce business. Increase in comps at the company’s Dick’s Sporting Goods stores were primarily driven by a 2.9% increase in sales per transaction and a 1% increase in customer traffic.

Third quarter gross profit came in at $406.1 billion, up 15.8% year over year, with gross margin expanding 123 basis points (bps) to 30.95%. A strong top-line growth along with better merchandise mix and flat occupancy and distribution costs resulted in improved gross profit as well as gross margin for the quarter.

Adjusted EBITDA in the quarter increased 18% year over year to $113.8 million, with EBITDA margin expanding 53 bps to 8.68%. The year-over-year improvement in adjusted EBITDA margin was primarily driven by expansion in gross profit margin, which was partially offset by increased selling, general and administrative (SG&A) expenses as a percentage of net sales.

We believe that the robust performance reflects the company’s sustained focus on enhancing its store network base and e-commerce capabilities while strategically partnering with brands and executing marketing plans.

Financial Aspects

Dick’s Sporting ended the third quarter of fiscal 2012 with cash and cash equivalents of $294.5 million, shareholders’ equity of $1.705.0 billion and no outstanding borrowings under its $500 million credit facility. The company incurred net capital expenditures of $157.4 million in the first nine months of fiscal 2012. Inventory per square foot, during the quarter, climbed 4% compared to the year-ago quarter.

Dividend

Dick’s Sporting has always been creating value for its shareholders by returning capital in the form of dividends. To improve shareholders’ wealth, the company recently declared a quarterly dividend of 12.5 cents per share, payable on December 28, 2012 to shareholders of record as of November 30, 2012.

Store Update

In the reported quarter, Dick’s Sporting opened 21 Dick's Sporting Goods stores, bringing the total of Dick's Sporting Goods stores to 511, spread across 44 states. Additionally, the company operated 81 Golf Galaxy stores in 30 states at the end of the quarter.

Moreover, through the starting of the fourth quarter, the company opened 7 new Dick’s Sporting Goods stores and relocated 5 Dick’s stores and 1 Golf Galaxy store. By inaugurating 7 new Dick’s stores in the current quarter, the company has achieved its target of opening a total of 38 new Dick’s Sporting Goods stores, relocating 5 Dick’s Sporting Goods stores and repositioning 1 Golf Galaxy store.

Guidance

For the fourth quarter of fiscal 2012, Dick’s Sporting now expects earnings per share to be between $1.03 and $1.05, compared with the year-ago earnings of 88 cents and up from the previously guided range of $1.01–$1.05. Comps for the upcoming quarter are expected to rise 4% against a 4.1% increases recorded in the same quarter last year. Moreover, comps for the quarter are expected to grow by 4% versus 0.1% growth reported in the same quarter last year.

For fiscal 2012, management expects earnings in the range of $2.53–$2.55 per share, while comps are expected to increase by 5%. Earlier, the company was expecting earnings of between $2.47 and $2.51 on the back of a 4%–5% increase in consolidated comps.

For 2012, the company expects to incur capital expenditures of $235 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 its 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.

Dick's Sporting currently has a Zacks #2 Rank which translates into a short-term Buy rating. However, citing a sluggish economic growth, we remain slightly cautious on the stock, and therefore maintain a long-term ‘Neutral’ recommendation. Moreover, the sporting goods market is highly competitive in nature and Dick’s Sporting’s failure to compete effectively in terms of price, quality or product will thwart its growth potential.

The company’s peer Hibbett Sports Inc. (HIBB - Analyst Report) is expected to release its third-quarter 2012 results before the market opens on November 16, 2012. We are expecting Hibbett’s earnings to grow over 15% to 68 cents per share from the comparable prior-year period earnings of 59 cents.

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