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DICK'S Sporting (DKS) Down 5.6% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for DICK'S Sporting Goods, Inc. (DKS - Free Report) . Shares have lost about 5.6% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is DKS due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

DICK'S Sporting Q1 Earnings Beat, Raises View

DICK'S Sporting Goods, Inc. reported impressive results in first-quarter fiscal 2018. Both top and bottom line outpaced estimates and improved year over year. In fact, this marked the third straight positive earnings surprise. As a result, management raised its earnings outlook for fiscal 2018.

Q1 Highlights

In the fiscal first quarter, DICK’S Sporting reported earnings of 59 cents per share, which outpaced the Zacks Consensus Estimate of 42 cents. The bottom-line figure also grew 9.3% from the year-ago quarter.

Net sales came in at $1,909.7 million, which exceeded the Zacks Consensus Estimate of $1,891 million and increased 4.6% from the prior-year quarter. Adjusting for the calendar shift owing to the 53rd week last year, consolidated comps fell 2.5%. Further, excluding this adjustment, consolidated comps dipped 0.9% in the quarter. However, consolidated comps were up 2.4% in the year-ago quarter.

Quarterly comps were hurt by decline of 3.7% in transactions due to cold spring weather in comparison to last year. This unfavorable weather led to a delayed start in key outdoor sports and activities. The decline was somewhat offset by a 1.2% rise in average ticket.

During the reported quarter, Fitness Equipment and Team Sports businesses were the best performers followed by positive comps in license sales owing to the Eagles Super Bowl win. Also, the company’s private brands reported double-digit comps growth, backed by robust sales growth from CALIA, Field & Stream and adidas, Team Sports and new brands. In addition, DICK’S Sporting cold weather businesses that include outdoor apparel and boots witnessed robust growth. However, sales declined at the hunting and electronics categories. These were all on a shifted basis.

Furthermore, solid e-commerce growth of 24% year over year, after adjusting the calendar shift due to the 53rd week in fiscal 2017, contributed to the fiscal first-quarter results. Notably, e-commerce penetration improved to about 11% of net sales compared with 9% in the prior-year quarter.

Delving Deeper

Gross margin contracted 35 basis points (bps) to 29.3%. The reduction can be attributed to increased shipping and fulfillment charges with respect to the enhancement of its e-commerce business along with occupancy expense deleverage. This was somewhat compensated with merchandise margins rate, which rose 18 bps due to lower promotions coupled with a favorable merchandise mix.

Further, SG&A expenses deleveraged 56 bps, owing to greater brand-building marketing expenses associated with Olympics, increased incentive compensation accruals as well as investment in its growth initiatives.

While operating income (EBIT) dipped 3.1% to $87.3 million, the operating margin contracted 30 bps to 4.6% mainly due to lower gross margin and SG&A expense deleverage.

Financial Aspects

DICK’S Sporting ended the quarter with cash and cash equivalents of $104.6 million and total shareholders’ equity of $1,898.2 million. Furthermore, the company had roughly $280 million as outstanding borrowings under its revolving credit facility as of May 5, 2018.

In the last 12 months, the company was consistent with its investments in e-commerce, while it returned more than $446 million to shareholders in the form of dividends and share repurchases.

As of May 5, 2018, DICK’S Sporting used roughly $19.1 million in cash from operating activities. Total inventory at the end of the quarter fell 3.8% on a year-over-year basis, while total capital expenditures amounted to nearly $49.3 million (on a gross basis) and $43.6 million (on a net basis).

For fiscal 2018, management expects to spend nearly $250 million on a net basis compared with $373 million last year.

Dividend and Share Repurchases

DICK’S Sporting has always created value for shareholders by returning capital in forms of dividends and share repurchases. In first-quarter fiscal 2018, the company paid dividends worth nearly $23.7 million and repurchased nearly 3.3 million shares for a total cost of $107.9 million. Following this, DICK’S Sporting had shares worth nearly $650 million, remaining under its standing authorization that extends through 2021.

On May 17, management announced a quarterly cash dividend of 22.5 cents per share, payable on Jun 29 to shareholders of record as of Jun 8, 2018.

Store Update

During the reported quarter, the company inaugurated eight namesake stores. As of May 5, 2018, DICK'S Sporting Goods operated 724 namesake stores across 47 states, 94 Golf Galaxy stores in 32 states and 35 Field & Stream stores in 16 states.

In fiscal 2018, the company plans to introduce 19 and relocate four flagship stores. Further, management does not intend to open any Field & Stream or Golf Galaxy stores in the fiscal year.

Guidance

Following the robust quarterly results, management raised its earnings per share guidance for fiscal 2018. Consolidated comps are still estimated to be flat to down low single-digit on a 52-week basis comparison. Comps dipped 0.3% in fiscal 2017.

Depending upon an expected 101 million shares outstanding, earnings per share are now envisioned in the band of $2.92-$3.12, up from the earlier guided range of $2.80-$3.00. The raised view was mainly backed by lower share account along with higher margins and lower tax rate in the first quarter. In fiscal 2017, it reported both GAAP and non-GAAP earnings per share of $3.01.

The earnings guidance is not based on share repurchases above the $107.9 million executed through first-quarter fiscal 2018.

As management stated earlier, sales and earnings will be favorably impacted in the first-half of fiscal 2018 owing to the calendar shift due to 53rd week in fiscal 2017. However, this shift is expected to hurt results in the second half of the fiscal year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been eight revisions higher for the current quarter.

VGM Scores

At this time, DKS has a subpar Growth Score of D, however its Momentum is doing a lot better with a B. The stock was also allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks style scores indicate that the company's stock is suitable for value and momentum investors.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, DKS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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