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Bull of the Day: Dicks Sporting Goods (DKS)

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There’s been a lot of focus lately on stocks that stood to benefit from at least part of the pandemic restrictions that we have all lived with in some form for the last 15 months. Companies that have made staying at home - including working predominantly from home - have been the obvious beneficiaries.

Now that vaccinations numbers are rising and many restrictions have been lifted, a great deal of that focus has shifted to “re-opening” stocks – companies that offer the goods and services that are in high demand as millions of people re-discover that activities they’ve been missing.

Dicks Sporting Goods (DKS - Free Report) was a great “lockdown” stock, but it’s an even better “re-opening” stock.

The company sells exactly the equipment and apparel that people want to get back out there, exercise, socialize and simply have fun. They also continue to see outsized dividends from their decision to act in a socially responsible way. Long before “ESG” became a common term in the investing world, Dicks decided to make the significant decision to curtail or entirely eliminate the sale of firearms and ammunition.

Dicks had been one of the country’s largest retailers of firearms and analysts and investors rightfully worried about the potential effect of that the loss of revenues from hunting enthusiasts.
Those customers tend to be strong advocates of second amendment rights who might see the move to limit the sales of firearms as an intrusion on those rights.

The decision came in February of 2018 and by the end of the year, Dick’s estimated that they had lost approximately $150 million in sales of guns in ammunition.

It turns out those initial investor fears were unwarranted because overall same store sales at Dick’s have actually been increasing significantly.

The hunting and shooting items that Dick’s stopped selling actually turned out to be fairly low-margin business – and one in which they often went head-to-head with the nation’s largest discount retailer, Walmart (WMT - Free Report) .

Dick’s selection of women’s and performance athletic apparel sell in greater dollar volumes and at higher profits than the firearms products they replaced. That’s largely due to an advantage of scale Dick’s enjoys because of its sheer size. They feature popular brands like Nike (NKE - Free Report) , Adidas and UnderArmour (UA - Free Report) , but they also have several private-label brands that are available exclusively at Dick’s.

The company has developed a line of women’s apparel and footwear called Calia with celebrity Carrie Underwood and also a brand of high-performance compression athletic garments called Second Skin that take aim at UnderArmour’s most popular items.

It’s a powerful one-two punch. Name-brand items bring customers into the stores, but intense price competition and higher wholesale prices often mean reduced margins on those goods. Offering customers choices of in-house brands gives Dick’s the chance to also sell those customers items with a lower retail price, but at bigger profits.

Those bigger profits are easy to see in a string of impressive quarterly reports. The most recent results highlighted net earnings of $3.79/share – 265% higher than the Zacks Consensus Estimate.

Those results weren’t an aberration, either. They came on the heels of sales and gross margins that increased simultaneously. Management increased revenue guidance for the rest of the year and analysts scrambled to revise their estimates upward. The Zacks Consensus Earnings Estimate for 2021 has risen more than 50% in the last 30 days from $4.96/share all the way to $7.62/share, earning Dicks Sporting Goods a Zacks Rank #1 (Strong Buy).

With that huge, expected increase in earnings, DKS currently trades at a very low 12-month forward P/E Ratio of just 13X.

It’s hard not to like a company that’s looking out for its customers and society at large, helping people live healthier and more fulfilling lives, earns industry-leading profits, trades at a value-stock price and even pays a 1.5% dividend yield.

It’s hard not to like Dicks Sporting Goods.

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DICK'S Sporting Goods, Inc. (DKS) - free report >>