Scoring a hat trick with earnings beat, DICK’S Sporting Goods Inc. (DKS - Free Report) released solid third-quarter fiscal 2016 results, as the company is gaining from bankruptcy declared by major rivals like the Sports Authority. Both sales and earnings surpassed expectations and improved year over year in the quarter, thus encouraging management to raise its outlook for fiscal 2016.
Despite the stellar results, shares of the company declined 6.9%, as management’s guidance for the fourth quarter (which also includes the holiday season) came in below analysts’ expectations, thus weighing upon investors’ sentiment.
The sporting goods company’s quarterly adjusted earnings of 48 cents per share cruised much ahead of the Zacks Consensus Estimate of 42 cents, alongside rising 6.7% year over year. Moreover, the bottom line significantly exceeded the company’s guidance range of 39–42 cents per share. On a GAAP basis, earnings per share rose 7.3% to 44 cents.
Net sales advanced 10.2% to $1,810.3 million in the reported quarter, also surpassing the Zacks Consensus Estimate of $1,772 million. Further, consolidated comparable store sales (comps) jumped 5.2%, faring much better than the company’s guidance range of 2%−3% growth. Comps at DICK’S Sporting stores improved 5.5%, though comps at Golf Galaxy stores dropped 3.3%.
Results in the quarter were mainly driven by robust comps, coupled with gross margin expansion. Further, tough inventory management, considerable market share gains and improvement witnessed across all core categories including apparel, footwear and hardlines boosted the quarterly performance.
Backed by the growth of its omni-channel network, DICK’S Sporting’s eCommerce business constituted 9.6% of the total sales in the reported quarter, up from 8% in the year-ago quarter.
Gross profit came in at nearly $552.8 million, up 13.2% year over year, while the gross margin expanded 81 basis points (bps) to 30.5%. Benefits from enhanced merchandise margins and lower occupancy expenses were partly offset by higher shipping expenses related to the company’s eCommerce operations.
However, the operating income fell 4.3% to $73.8 million, while the operating margin contracted 60 bps to 4.1%, mainly because of selling, general and administrative expenses deleverage (as a percentage of sales).
DICK’S Sporting ended the quarter with cash and cash equivalents of $85.4 million, and shareholders’ equity of $1,869.9 million. At quarter end, the company had about $260.9 million as outstanding borrowings under its revolving credit facility.
During the first three quarters of fiscal 2016, DICK’S Sporting generated cash worth roughly $184.4 million from operating activities. Total inventory at quarter end grew 4.8% on a year-over-year basis, while total capital expenditures during the quarter amounted to roughly $99 million (on a gross basis) and $53 million (on a net basis).
For fiscal 2016, the company anticipates capital expenditure of $450 million on a gross basis and $275 million on a net basis.
Dividend and Share Repurchases
DICK’S Sporting has always created value for its shareholders by returning capital in the form of dividends and share repurchases. Over the last 12 months, the company invested its capital for omni-channel growth and returned more than $240 million to shareholders.
DICK’S Sporting repurchased roughly 0.2 million shares for $9 million during the third quarter, including which it has repurchased shares worth nearly $116 million year to date, and $929 million since the start of fiscal 2013. As of quarter-end, the company had shares worth $1.1 billion remaining under its standing authorization that extends through 2021. The company also paid dividends worth nearly $16.8 million during the quarter.
Further, on Nov 10, 2016, management declared a quarterly cash dividend of 15.125 cents per share, payable on Dec 30, 2016, to shareholders on record as of Dec 9.
On Nov 2, the company concluded the buyout of certain assets of Golfsmith International Holdings, Inc., for nearly $43 million. The buyout, which includes intellectual property and rights to buy store leases, along with inventory for 30 stores, is expected to boost DICK’s Sporting’s bottom line in fiscal 2017.
Also, on Jul 20, DICK’s Sporting bought intellectual property assets of The Sports Authority's (“TSA”), along with the right to buy 31 store leases – out of which it plans to retain 22 leases in order to convert them into its own stores. Further, the company plans to utilize the TSA consumer information it gained, in the fourth quarter – as part of its marketing operations.
DICK’S Sporting opened 27 namesake stores, seven Field & Stream stores and two Golf Galaxy stores. Also, the company relocated four namesake stores, alongside shutting down one Field & Stream store. This took the total store count, as of Oct 29, 2016, to 676 DICK'S Sporting Goods stores across 47 states, 74 Golf Galaxy stores in 29 states, and 27 Field & Stream stores in 13 states.
In fiscal 2016, the company plans to open nearly 38 new namesake stores, nine new Field & Stream outlets and two new Golf Galaxy stores. Also, it intends to relocate nine namesake stores.
In the fourth quarter, the company plans to re-open three former TSA stores as DICK’s Sporting outlets. Additionally, DICK’s Sporting, which is currently operating 30 Golfsmith stores, intends to retain and convert these stores into the Golf Galaxy brand by fourth-quarter end.
Management remains impressed with its splendid quarterly performance, which outperformed all expectations. Going forward, this Zacks Rank #3 (Hold) company expects to continue gaining market share this holiday season – backed by its robust assortments and marketing initiatives. Also, some analysts believe that DICK’s Sporting is likely to continue benefiting from the collapse of some of its major rivals in the sporting goods space.
This encouraged management to raise its earnings and comps outlook for fiscal 2016. For the fiscal year, the company now expects adjusted earnings to range from $2.99−$3.11 per share, up from $2.90–$3.05 predicted earlier. The company envisions GAAP earnings to come in a band of $2.91−$3.03 per share.
Further, consolidated comps growth for fiscal 2016 is now anticipated in a range of 3%−4%, compared with 2%−3% projected earlier.
For the fourth quarter of fiscal 2016, the company envisions adjusted earnings per share to lie in the band of $1.19−$1.31, which is pegged lower than the Zacks Consensus Estimate of $1.32. On a GAAP basis, earnings are expected to range from $1.15−$1.27 per share. Consolidated comps growth for the fourth quarter is projected to range from 3%– 6%.
Better-ranked stocks in the same industry include Big 5 Sporting Goods Corp. (BGFV - Free Report) , Hibbett Sports, Inc. (HIBB - Free Report) and ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Big 5 Sporting has an average positive earnings surprise of 4.8% in the trailing four quarters. The stock, with a long-term growth rate of 12%, has seen positive estimate revisions in the last 30 days.
Hibbett has an average earnings beat of 3.9% in the last four quarters, with a beat in each quarter. Moreover, the company’s long-term growth rate of 11.1% and Earnings ESP of +4.00% bode well. The company is slated to report earnings on Nov 18.
ULTA Salon’s solid long-term EPS growth rate of 19.5% and positive estimate revisions over the past 30 days help it stand strong in the industry. Further, the company flaunts a spectacular earnings history with its Earnings ESP currently pegged at +0.73%.
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