Nathan Yates
August 18, 2016
Nathan Yates, Forward View
Director of Research & Consulting

Dick’s Sporting Goods: 2Q Earnings Earn the Gold Medal

Key Points:

• Dick’s Sporting Goods crushed 2Q earnings expectations.

• 2Q diluted EPS of $0.82 exceeded expectations by $0.14.
• Revenue of $1.97B beat the Wall Street consensus by $83M.
• Forward View had forecast EPS of $0.70 and revenue of $1.88B.
• Dick’s Sporting Goods also raised FY16 guidance.

Earnings Summary

On Tuesday, August 15th, Dick’s Sporting Goods reported 2Q16 earnings. For the quarter, the company earned $0.82 of diluted EPS on revenue of $1.97B. Revenue was up 7.9% y/y, and EPS rose by a nickel y/y. Same-store sales climbed 2.8% for the quarter, well ahead of the company’s forecast for a decline of 1–4% in same-store sales. Same store sales for Dick's Sporting Goods locations increased 3.0%, but comps fell 4.3% at Golf Galaxy.

Gross margin was flat y/y at 30.36% of revenue and SG&A ticked up 73 basis points to 22.45% of sales. With the company’s ongoing footwear department upgrades and new e-commerce system development, the extra SG&A expense isn’t surprising. E-commerce sales rose 26% y/y, though, so the investment in technology is obviously worthwhile.

Guidance: Increased. Dick’s Sporting Goods now expects FY16 diluted EPS of $2.90–$3.05, up from previous EPS guidance of $2.60–$2.90. Management had previously predicted that 2016 same-store sales would be ±1%, but 2–3% growth is now forecast. Full-year capex guidance also rose from $230M on a net basis and $420M on a gross basis to $275M on a net basis and $450M on a gross basis.

Dick’s Sporting Goods initiated 3Q guidance of diluted EPS between $0.39–$0.42 and forecast same-store sales growth of 2–3%. Costs related to the remodeling of former Sports Authority locations aren’t factored into the guidance. (We don’t expect those expenses will be a major earnings drag, though.)

Best News
The liquidation of Sports Authority and Sports Chalet stores has largely finished, thus ifying a temporary headwind we had previously cited. By moving beyond the competitors’ liquidations ahead of schedule, Dick’s Sporting Goods can enjoy fresh opportunities heading into football and back-to-school season. The Olympics, of course, also offer beneficial marketing and sales possibilities. As Team USA, sponsored by Dick’s, thoroughly dominates everybody else, look for a small increase in retail traffic for sporting goods retailers across the nation.

As we’ve said before, the 31 former Sports Authority leases acquired by Dick’s is far less important than the elimination of a key competitor. All 31 leases won’t even be converted into stores as Dick’s decided to dump a few of them post-acquisition. (Still, it’s interesting that Dick’s COO commented on the importance of the 20 leases obtained in California and South Florida, plus a focus on opening new stores in Houston. Look for the Sports Authority locations to be reopened as Dick’s Sporting Goods stores within a year.) In the sporting goods sector, it’s rare that a major retailer has such an opportunity to steal market share. While it’s difficult to forecast exactly how much of Sports Authority’s business will shift to Dick’s, no other retailer is likely to benefit more. Dick’s is the gold medal winner right now.

Interestingly, the Cavaliers’ NBA Championship materially benefited Dick’s 2Q sales. Cleveland finally had something to celebrate in sports, and a lot of Cavs merchandise flew out the doors. The Pittsburgh Penguins’ NHL Championship had a smaller impact, and our long-term thesis that Americans will spend to support and celebrate their favorite teams is certainly intact.

Worst News
There’s not much bad news to discuss, but Dick’s modest Golf Galaxy business was disappointing in 2Q. Yes, golf product margins slightly improved, but demand was soft. With Callaway Golf (NYSE: ELY) reporting solid 2Q numbers, we anticipated that Golf Galaxy comps would be off closer to 2%. Obviously, golf is one of the few major American sports suffering weakness thus far in 2016. As consolidation in the golf equipment and retail businesses moves forward, look for Dick’s Sporting Goods to focus on strategic adjustments. Dick’s Sporting Goods faces both opportunities and threats in golf. For example, Golfsmith is teetering on bankruptcy (opportunity) but Nike (NYSE: NKE) will no longer be manufacturing golf clubs and balls (threat). Our golf industry analyst, Michael Williams, will continue to utilize field research and his network of sources to understand the sector’s shifting landscape.

The Forward View
Forward View is reiterating our Buy rating on Dick’s Sporting Goods and raising our target price to $64 per share. Around $3.2B of annual sporting goods sales have been dislocated by the bankruptcies of Sports Authority and Sports Chalet. Those dollars are going to move somewhere, and even if Dick’s only grabs 10% of the pie, the company’s revenue will see a 4% annual sales growth benefit next year. Based on our own estimate, look for closer to a 6–7% revenue boost from industry consolidation alone. That’s akin to turbocharging an already strong retailer. We love it.
3Q is unlikely to exceed expectations as thoroughly as the 2Q report, but that’s not really important. There may have been enough pull-forward of footwear and apparel in liquidations to keep 3Q more underwhelming. Still, that’s just temporary. Over the long-run, the Forward View is that Dick’s is well-positioned for the 2016 holiday season and beyond. Weak comps in the upcoming winter will be easy to beat, and Dick’s buyback plan still has over $1B left to spend. The declining share count leaves the stock valuation in reasonable territory, despite recent price appreciation. The current TTM PE is just 20. That’s cheap for a legitimate growth stock.

Our earnings estimates have increased by $0.01 in 4Q and by $0.14 for FY17 due to reduced competitive pressure. Our FY16 total revenue forecast has risen by $245.5M, with most of the change made in 4Q. We’re expecting 8% y/y sales growth in 4Q, primarily in the holiday shopping season. Our FY17 revenue estimate is now $235M higher, too. We invite you to review our full quantitative analysis and our earnings estimates in the attached document. As always, we invite your questions and research inquiries. Thank you for your readership. If you have found value in this earnings analysis, please sign up for a free trial of the Sporting Goods Monitor equity research service.

* Note that Dick’s Sporting Goods is currently searching for a new CFO as Terri List-Stoll recently left the company.

Stocks cited: $DKS $ELY $NKE
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