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DICK'S Sporting (DKS) Falls on Soft FY18 View, Q3 Earnings Top

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DICK'S Sporting Goods, Inc. (DKS - Free Report) reported a solid third-quarter fiscal 2017, with both earnings and sales surpassing estimates. This marked the company’s return to positive earnings trend after a miss in the preceding quarter. Moreover, it displayed top-line beat for the second straight quarter and the fifth time in the last six quarters.

Following the splendid results, the company provided the fourth-quarter outlook and raised its earnings view for fiscal 2017. However, the company provided a not-so-impressive initial view for fiscal 2018.

Despite the beat and a raised fiscal 2017 view, shares of this sporting goods retailer declined nearly 2.8% yesterday. Much of this dip stemmed from the company’s dismal view for fiscal 2018. Moreover, the company’s expectations of a highly promotional and challenging retail environment, keeping margins under pressure, probably aroused investors’ fears.

In fact, this Zacks Rank #4 (Sell) stock has tumbled 51.8% year to date, wider than the industry’s loss of 22.2%.


Q3 Highlights

DICK’S Sporting posted adjusted earnings of 30 cents per share in the fiscal third quarter that surpassed the Zacks Consensus Estimate of 26 cents but declined 37.5% from the year-ago quarter. On a GAAP basis, the bottom line dipped 20.5% to 35 cents per share. However, reported earnings came ahead of the company’s guidance range of 22-30 cents 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 $1,944.2 million topped the Zacks Consensus Estimate of $1,889 million and grew 7.4% from the prior-year quarter. Consolidated comps edged down 0.9% compared with the company’s forecast of a low single-digit decline.

The comps decrease was backed by 0.9% fall in transactions, while ticket remained unchanged. Further, results gained from solid e-commerce growth, which was up 16% year over year and contributed 10.3% to net sales. During the reported quarter, golf and private brand businesses were the best performers, followed by a decent show put up by the athletic footwear business. However, sales remained soft at the hunting and electronics businesses.

Delving Deeper

Gross margin contracted 307 basis points (bps) to 27.47%. This reduction stemmed from lower merchandize margins due to a highly promotional backdrop, occupancy de-leverage, as well as elevated shipping and fulfillment expenses, as a percentage of sales.

However, adjusted SG&A expenses leveraged 56 bps owing to the company’s new e-commerce operating model, lower incentive compensation and other cost-reduction initiatives. Further, pre-opening expenses dipped 65 bps due to reduced store openings in 2017 and lack of entry in new markets.

Despite the expense leverage, adjusted operating income plunged 40.6% to $49.8 million, while the operating margin contracted 207 bps to 2.56% mainly due to lower gross margin.

Financial Aspects

DICK’S Sporting ended the fiscal third quarter with cash and cash equivalents of $111.8 million and total shareholders’ equity of $1,873 million. Furthermore, the company had $455 million outstanding borrowings under its revolving credit facility as of Oct 28, 2017.

In the past year, the company has been consistent with its investments in e-commerce, while it also returned more than $343 million to shareholders in the form of dividends and share repurchases.

During the nine months of fiscal 2017, DICK’S Sporting generated roughly $125.5 million cash from operating activities. Total inventory at the end of the quarter grew 4.1% on a year-over-year basis, while total capital expenditures during the quarter amounted to nearly $151 million (on a gross basis) and $136 million (on a net basis).

Dividend and Share Repurchases

DICK’S Sporting has always created value for shareholders by returning capital in the form of dividends and share repurchases.

The company paid dividends worth nearly $17.9 million during the quarter. On Nov 9, management announced a quarterly cash dividend of 17 cents per share. This is payable on Dec 29 to shareholders of record as on Dec 8, 2017.

Furthermore, DICK’S Sporting repurchased roughly 2.9 million shares worth $76 million during the quarter, following which it had shares worth nearly $800 million remaining under its standing authorization that extends through 2021.

Store Update

During the reported quarter, the company inaugurated 15 namesake and six new Field & Stream stores, while it shuttered two specialty concept outlets. These actions took the total store count, as of Oct 28, 2017 to 719 DICK'S Sporting Goods stores across 47 states, 98 Golf Galaxy stores in 32 states, and 35 Field & Stream stores in 16 states.

Guidance

Going forward, management remains confident of driving market share growth in the fiscal fourth quarter and through fiscal 2018, backed by its current strategy and tactics. However, the company expects the retail environment to be extremely promotional in the fourth quarter and fiscal 2018. This, along with excess inventory in the supply chain, broadened distribution strategies from some vendors and lack of innovation and novelty, is likely to keep margin under pressure.

Nonetheless, the company plans to make significant investments in its business in the fiscal fourth quarter and through the next year as it remains confident of the long-term potential and sees tremendous opportunities in the evolving industry. As part of the plan, the company anticipates increasing investments in e-commerce, the technology in its stores and store payroll to enhance consumer experience. Additionally, the company plans to make significant investments in DICK'S Team Sports HQ, and in the development and support of private brands.

While these investments are anticipated to enhance dividends in the future, it is likely to thwart the company’s earnings in the near term.

Following the strong fiscal third quarter, the company raised its earnings per share view for fiscal 2017. Management now projects adjusted earnings in the range of $2.92-$3.04 per share for fiscal 2017, against $2.80-$3.00 guided earlier. In fact, the guidance includes nearly 5 cents from the additional 53rd week. GAAP earnings per share are now expected in the range of $2.95-$3.07. Comps for the fiscal are anticipated to be flat to low single-digit negative.

For the fiscal fourth quarter, the company envisions earnings to lie in the band of $1.12-$1.24 per share, based on low single-digit decline in comps.

Moreover, consolidated operating margins are expected to decrease year-over-year in both fourth-quarter and fiscal 2017, due to lower gross margin offset by SG&A leverage.

On the back of the aforementioned investments and a challenging environment, continued gross margin pressure and nearly flat comp sales, the company projects earnings per share to fall as much as 20% in fiscal 2018 compared with fiscal 2017 levels.

In addition to this, the company expects to open about 15-20 stores in fiscal 2018, against 59 store planned for fiscal 2017. Net capital expenditures for the fiscal are anticipated in the range of $250-$350 million, versus $400 million expected in fiscal 2017.

Want More of Retail Stocks? Check These

Better-ranked stocks in retail sector include KAR Auction Services, Inc (KAR - Free Report) , American Eagle Outfitters Inc. (AEO - Free Report) and Zumiez Inc. (ZUMZ - Free Report) , each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KAR Auction has gained 7.9% in the last three months. Moreover, it has a long-term earnings growth rate of 13.4%.

American Eagle, with a long-term earnings growth rate of 8.7%, gained 19% in the last three months.

Zumiez, with a long-term earnings growth rate of 18%, has improved a substantial 43.9% in the last three months.

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