One of the toughest areas of retail is the sporting goods sector. The industry is littered with failed concepts and bankruptcy issues. I met a high-ranking executive at a sporting goods company many years ago and he said it is simple – do not take on too much debt and focus on your regional specialties. In other words, do not sell surfboards in Iowa. That company was Dick's Sporting Goods Inc. (DKS, Financial). The company is a large sporting goods retailer operating primarily in the U.S. The company provides sporting goods equipment, fitness equipment, golf equipment, hunting and fishing gear, apparel and footwear.
Key brands include Dick's Sporting Goods, Golf Galaxy, Field & Stream, Public Lands, Going Going Gone!, Dick’S House of Sports and Golf Galaxy Performance Center. It also owns GameChanger, which is a youth sports mobile application for video streaming, scorekeeping, scheduling and communications.
The comany was founded in 1948 when 18-year-old Dick Stack was working at an Army surplus store in Binghamton, New York. It was formerly known as Dick's Clothing and Sporting Goods Inc. and changed its name to Dick's Sporting Goods in April 1999. The company was incorporated in 1948 and is headquartered in Coraopolis, Pennsylvania. It currently has a market capitalization of $9.9 billion.
Business optimization
Due to the tough operating environment for retailers, the company is engaged in a business optimization strategy to better align employment, organizational design and spending in support of the most critical strategies, while also streamlining the overall cost structure. As part of this review, the company eliminated certain positions primarily at the customer support center on Aug. 21, which will incur approximately $20 million of severance expense in the third quarter of 2023. Related cost savings are expected to be largely offset by strategic talent investments over the next 12 months. The company currently expects the business optimization to be completed during fiscal 2023 and may result in additional one-time charges of $25 million to $50 million.
Financial review
The company recently reported second-quarter results, which showed net revenue increasing 4.4% to $6.1 billion compared to the prior-year period of $5.8 billion in sales. Same-store sales increased 2.6%. Pre-tax income decreased 5% to $549 million. The pre-tax margin declined to 10.8% from 13.1%, largely due to shrink, which is an industry term for theft or shoplifting. Other retailers such as Target (TGT, Financial) and Dollar General (DG, Financial) have also reported higher levels of shrink recently.
Adjusted earnings per share declined to $2.82 from $3.68 in the prior-year period. For the six-month period ending July 31, operating cash flow was $693.5 million and with capital expenditures of $248.5 million, free cash flow was $445 million. Share repurchases totaled $260.4 million and dividend payments were $189.1 million. Cash balances increased to $1.9 billion and total debt stood at $1.5 billion. Inventories decreased 5% to $2.85 billion.
In a statement, CEO Lauren Hobart said, "We are pleased with our strong sales performance for the second quarter led by robust transaction growth and continued market share gains. Within the quarter, sales accelerated significantly in July, and we remain confident in delivering positive comp sales for 2023. While we posted another double-digit EBT margin, our Q2 profitability was short of our expectations due in large part to the impact of elevated inventory shrink, an increasingly serious issue impacting many retailers. Despite moderating our 2023 EPS outlook, the enthusiasm we have for our business and the confidence we have in our long-term growth opportunities have never been stronger."
Valuation
Consensus earnings per share estimates for the 2023 fiscal year are $11.93 and $12.43 for the following year. That puts the stock trading at 9.8 times earnings and 9.3 times forward-looking earnings. The sector median is in the 11 to 13 range.
The GuruFocus discounted cash flow calculator creates a value of $165 using $11.93 as the earnings starting point and a 6% long-term growth rate.
There are 18 analysts that have recent ratings on the company with an average price target of $130, including a high target of $150 and a low target of $110.
The company pays an annualized dividend of $4, which creates a current dividend yield of 3.48%.
Guru trades
Gurus who have purchased the stock or added to their positions recently include John Hussman (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies. Investors who have reduced or sold out of their positions include Louis Moore Bacon (Trades, Portfolio) and Steve Mandel (Trades, Portfolio).
Summary
The stock has sold off recently after disappointing quarterly results and trades nearly 25% off recent 52-week highs. Despite near-term headwinds and slowing consumer purchases, the company still has operating momentum in apparel as well as execution in the omni-channel experience.
Dick's Sporting Goods appears to be significantly undervalued and represents a solid opportunity for long-term value investors. The above-market dividend yield of 3.48% should provide some level of stability.
