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DICK'S Sporting (DKS) Q2 Earnings Beat, Sales Miss Estimates

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DICK'S Sporting Goods, Inc. (DKS - Free Report) reported mixed second-quarter fiscal 2018 results, wherein earnings outpaced the estimates but sales missed. However, both the top and bottom line improved year over year. In fact, this marked the fourth straight positive earnings surprise, while sales lagged estimates after a beat in the last reported quarter. Furthermore, management raised its earnings outlook for fiscal 2018.

Nevertheless, shares of this sporting goods retailer were down in the pre-market trading hours following the earnings release. This downside might be due to lower-than-expected sales along with soft comparable store sales (comps) in the quarter under review. Year to date, this Zacks Rank #2 (Buy) stock has rallied 26.6%, outperforming the industry’s 8.9% rally.



Q2 Highlights

In the fiscal second quarter, DICK’S Sporting reported earnings of $1.20 per share, which outpaced the Zacks Consensus Estimate of $1.04. The bottom-line figure also grew 25% from the year-ago quarter number.

Net sales came in at $2,177.5 million, which increased 1% year over year but came below the Zacks Consensus Estimate of $2,236 million. After adjusting for the calendar shift owing to the 53rd week last year, consolidated comps fell 4%. Further, excluding this adjustment, consolidated comps dipped 1.9% in the quarter. Consolidated comps were up 0.1% in the year-ago quarter.

Quarterly comps were hurt by the strategic decisions owing to slow growth, soft hunt and electronics businesses, which comprise roughly 50% of decline in comps. Also, the company is witnessing major decline in Under Armour, Inc.’s (UAA - Free Report) sales due to the expansion of its distribution.

Furthermore, solid e-commerce growth of 12% year over year, after adjusting the calendar shift due to the 53rd week in fiscal 2017, contributed to the quarterly results. Notably, e-commerce penetration improved to about 11% of net sales compared with 9% in the prior-year quarter.

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

Delving Deeper

Gross margin improved 80 basis points (bps) to 30.3% in the quarter under review. The uptick was driven by higher sales along with merchandise margins, courtesy of lower promotions and a favorable product mix.

Further, SG&A expenses deleveraged nearly 100 bps owing to higher investments in growth initiatives.

However, operating income (EBIT) increased 2.1% to $162.5 million with the operating margin expansion of 10 bps to 7.5% mainly owing to higher gross margin, somewhat offset by increased SG&A expenses.

Financial Aspects

DICK’S Sporting ended the quarter with cash and cash equivalents of $124.3 million and total shareholders’ equity of $1,931.2 million. Furthermore, the company had roughly $108 million as outstanding borrowings under its revolving credit facility as of Aug 4, 2018.

In the first half of fiscal 2018, DICK’S Sporting generated $315.9 million in cash from operating activities. Total inventory fell 6.4% year over year at the end of the reported quarter. Moreover, total capital expenditures in the first half amounted to nearly $96.5 million (on a gross basis) and $83.4 million (on a net basis).

For fiscal 2018, management expects to spend nearly $225 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 the form of dividends and share repurchases. In second-quarter fiscal 2018, the company bought back nearly 2.2 million shares for a total cost of $73.8 million. Following this, DICK’S Sporting had shares worth nearly $575 million remaining under its standing authorization that extends through 2021.

In a year’s time, the company returned more than $381 million to shareholders via share repurchases and dividends.

On Aug 24, management also announced a quarterly cash dividend of 22.5 cents per share, payable Sep 28 to shareholders of record as of Sep 14, 2018.

Store Update

During the reported quarter, the company inaugurated five namesake stores. As of Aug 4, 2018, DICK'S Sporting Goods operated 729 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 still plans to open 19 and relocate four flagship stores. Further, management does not intend to open Field & Stream or Golf Galaxy stores in the fiscal year.

Guidance

Following the mixed quarterly results, management raised its earnings per share guidance for fiscal 2018. Consolidated comps are now estimated to be down 3-4% (on a 52-week basis comparison) versus earlier projection of flat to down low single-digit. Comps dipped 0.3% last year.

Further, earnings per share are now envisioned in the band of $3.02-$3.20, up from the earlier guided range of $2.92-$3.12. In fiscal 2017, it reported earnings per share of $3.01. The Zacks Consensus Estimate for fiscal 2018 is pegged at $3.09. Earnings guidance is not based on additional share buybacks.

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