Dick’s Dismal Earnings Hit New Low
Zacks Investment Research | May 21, 2014 11:51AM ET
Shares of Dick's Sporting Goods (NYSE:DKS) hit a new 52-week low of $43.51 yesterday after the company posted lower-than-expected first-quarter fiscal 2014 results and lowered its fiscal guidance due to persistent weakness at the golf and hunting businesses.
The stock closed trading at $43.60 yesterday, approximately 18% below the previous day’s closing price of $53.16. As per Bloomberg, this is the highest decline the company has witnessed since it got listed in Oct 2002. So far this year, shares of this sporting goods retailer have plunged 24.2%.
Coming back to quarterly results, DICK’S Sporting’s adjusted earnings of 50 cents per share not only missed its own guidance range of 51– 52 cents but also came below the Zacks Consensus Estimate of 53 cents. Management has blamed unfavorable weather for this miss, which negatively impacted its golf and hunting businesses.
DICK’S Sporting was expecting some year-over-year improvement in the golf business but instead it witnessed a significant decline. Moreover, the hunting business, in which the company was expecting some meager decline performed even weaker than anticipated.
However, the company’s quarterly adjusted earnings were approximately 4.2% higher than the year-ago comparable quarter earnings of 48 cents per share. On a GAAP basis which includes certain one-time items, the company reported earnings of 57 cents per share, up nearly 9.6% from the prior-period earnings of 52 cents.
Quarter in Detail
Despite persistent weakness in the golf and hunting businesses, the company’s total sales grew 7.9% to $1,438.9 million in the quarter, primarily driven by store openings, increased e-Commerce business and improved consolidated comparable-store sales (comps) performance. Total revenue, however, lagged the Zacks Consensus Estimate of $1,459.0 million.
DICK’S Sporting’s e-Commerce business constituted 7% of the total sales in the reported quarter compared with 5.8% in the year-ago quarter.
The company’s consolidated comps increased 1.5% compared with a decline of 3.8% in the prior-year period. However, consolidated comps were below the company’s guidance range of 3%–4%.
Comps at DICK’S Sporting Goods stores increased 2.3% while comps at Golf Galaxy stores declined 10.4%. The year-over-year rise in comps at DICK’S Sporting Goods stores was primarily attributable to an increase of 0.2% in traffic and a rise of 2.5% in sales per transaction.
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Gross profit in the said quarter came in at $440.9 million, up 7.1% year over year. However, gross margin contracted 23 basis points (bps) to 30.64% primarily due to increased occupancy costs and higher shipping costs owing to rise in e-commerce sales. These negatives were partially offset by 30 bps expansion in merchandise margin.
Adjusted operating income for the quarter was almost flat year over year at $97.7 million versus $97.6 million in the first quarter of fiscal 2013. However, operating margin contracted 53 bps to 6.79%. The year-over-year fall in operating margin was primarily due to lower gross margin and increased store pre-opening expenses as a percentage of net sales, partially offset by lower selling, general and administrative (SG&A) expenses as a percentage of sales.
Financial Aspects
DICK’S Sporting ended the quarter with cash and cash equivalents of $139.4 million and shareholders’ equity of $1,735.2 million. Moreover, the company did not have any outstanding borrowings under its $500 million credit facility.
During the quarter, DICK’S Sporting generated cash flow of $13.9 million from its operational activities, and had net capital expenditure of $39.9 million. Total inventory at the quarter-end grew 12.8% on a year over year basis.
Dividend & Share Repurchases
DICK’S Sporting has always created value for its shareholders by returning capital in the form of dividends and share repurchases. To boost shareholder wealth, the company on May 15 declared a quarterly dividend of 12.5 cents per share, which will be paid on Jun 27, 2014 to shareholders of record on Jun 6, 2014.
During the reported quarter, DICK’S Sporting repurchased about 0.5 million shares for a total sum of $25.0 million. Since the announcement of $1.0 billion share repurchase program in Mar 2013, the company has bought almost $280.6 million worth of its common stock.
Store Update
In the reported quarter, DICK’S Sporting opened 8 namesake stores and relocated 1 Golf Galaxy and 1 namesake store. This brought the company’s count of DICK'S Sporting Goods stores to 566 and Golf Galaxy stores to 84, located across 46 and 29 states, respectively, as of May 3.
Guidance
Looking at the first-quarter operating results, the company now anticipates that its golf business will remain weak throughout fiscal 2014 while hunting business will stabilize by the fiscal year end. Considering these, DICK’S Sporting has revised its fiscal 2014 outlook.
For fiscal 2014, management now anticipates earnings per share to be between $2.70 and $2.85, down from previous forecast of $3.03 and $3.08. Currently, the Zacks Consensus Estimate stands at $2.85 per share. Comps are now projected to grow in the range of 1%–3% versus earlier anticipation of 3%–4%. Further, the company still intends to open about 50 namesake stores, 8 Field & Stream stores and 1 Golf Galaxy store and also expects to relocate 5 namesake stores and 2 Golf Galaxy stores. Furthermore, it wants to remodel five DICK’S Sporting Goods stores.
For fiscal 2014, the company anticipates capital expenditure of $360 million on a gross basis and $265 million on a net basis.
Apart from updating fiscal 2014 guidance, DICK’S Sporting initiated its second-quarter fiscal 2014 outlook. DICK’S Sporting anticipates its earnings per share to come in the range of 62–67 cents on a non-GAAP basis. On a GAAP basis, the company expects earnings of 67 cents per share. Currently, the Zacks Consensus Estimate stands at 64 cents per share. Comps for the second quarter are expected to increase in the range of 1%–3%. Further, during the quarter, DICK’S Sporting intends to open 8 namesake stores and 1 Field & Stream store. Apart from this, it anticipates relocation of three DICK’S Sporting Goods stores in the quarter.
Other Stocks Worth Considering
Currently, DICK's Sporting carries a Zacks Rank #3 (Hold). Some better-ranked players in the retail space include American Ap (NYSE:APP), Foot Locker (NYSE:FL) and Genesco Inc (NYSE:GCO). All of these have a Zacks Rank #2 (Buy).
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