DICK'S Sporting (DKS) Up On Q1 Earnings Beat, Cuts Outlook

After missing earnings estimates for two consecutive quarters, DICK’S Sporting Goods Inc. (NYSE:DKS) bounced back with better-than-expected bottom-line results in the first quarter of fiscal 2016, thus starting the year on a positive note. Following the results, shares of the company jumped 8.6%.

The company’s quarterly earnings of 50 cents per share came a penny ahead of the Zacks Consensus Estimate, while declining 5.7% year over year. Nonetheless, the bottom line met the upper end of the company’s guidance range of 48–50 cents per share.

Quarter in Detail

Net sales advanced 6.1% to $1,660.3 million in the reported quarter, but missed the Zacks Consensus Estimate of $1,663 million.

Further, consolidated comparable store sales (comps) rose 0.5%, falling within the company’s guidance range of flat to +1% growth. Comps at DICK’S Sporting stores inched up 0.4%, while comps at Golf Galaxy stores climbed 1.7%.

Backed by the growth of its omni-channel network, DICK’S Sporting’s eCommerce business constituted 9.2% of the total sales in the reported quarter, up from 8.5% in the year-ago quarter.

Gross profit in the reported quarter came in at nearly $495.8 million, up 5.7% year over year, while the gross margin shriveled 10 basis points (bps) to approximately 29.9%. The contraction was mainly accountable to higher occupancy and shipping costs (as a percentage of sales), somewhat compensated by enhanced merchandise margins.

Operating income declined 10.9% to $90.7 million, while the operating margin contracted 100 bps to 5.5%, mainly because of weak gross margin coupled with selling, general and administrative expenses deleverage (as a percentage of sales).

Financial Aspects

DICK’S Sporting ended the first quarter with cash and cash equivalents of $92.5 million, and shareholders’ equity of $1,804.1 million. At quarter end, the company had about $158 million as outstanding borrowings under its revolving credit facility.

During the quarter, DICK’S Sporting used cash worth roughly $135 million as operating activities. Total inventory at quarter end grew 7.3% on a year-over-year basis, while total capital expenditures in the quarter amounted to roughly $89 million, on a gross basis.

For fiscal 2016, the company anticipates capital expenditure of $420 million on a gross basis and $230 million on a net basis.

Dividend and Share Repurchases

DICK’S Sporting has always created value for its shareholders by returning capital in the form of dividends and share repurchases. During the quarter, the company invested its capital for omni-channel growth and returned more than $322 million to shareholders.

DICK’S Sporting repurchased roughly 1.1 million shares worth $50 million during the first quarter, following which it had shares worth $137 million remaining under its fiscal 2013 authorization. Apart from this, the company authorized a new five-year buyback plan up to $1 billion in Mar 2016. However, the company will continue to repurchase shares under its fiscal 2013 program, until exhaustion.

Further, on May 13, 2016, management declared a quarterly cash dividend of 15.125 cents per share, payable on Jun 30, 2016, to shareholders of record as on Jun 10.

Store Update

DICK’S Sporting opened 3 namesake and 2 Field & Stream stores, alongside relocating 3 namesake stores, during the first quarter. This took the total store count, as of Apr 30, 2016, to 647 DICK'S Sporting Goods stores across 47 states, 73 Golf Galaxy stores in 29 states, and 21 Field & Stream stores in 10 states.

In fiscal 2016, the company plans to open nearly 36 new namesake stores, 9 new Field & Stream outlets and 2 new Golf Galaxy stores. Also, the company intends to relocate 9 namesake stores. In the second quarter, the company intends on introducing and relocating 5 and 2 namesake stores, respectively.

Guidance

Management remains impressed with its quarterly performance even amid the tough macroeconomic conditions. Going forward, it intends to remain committed to further store expansion, store productivity enhancement and investments in omni-channel business for continued improvement.

Further, there is a lot of liquidation going on in the sporting goods space. Evidently the Sports Authority, which recently declared bankruptcy, is on track to liquidate its stores, among others. The heightened liquidation is likely to lead to industry consolidation, which in turn will undoubtedly benefit DICK’S Sporting in the long run, by helping it grab significant market share. However, the company anticipates witnessing near-term pressure.

This caused management to lower its earnings outlook for fiscal 2016, alongside providing a bleak view for the second quarter.

For fiscal 2016, the company now expects earnings in the range of $2.60−$2.90 per share, against $2.85–$3.00 envisioned earlier. Comps growth is now projected in a range of -1% to +1%, compared with flat to 2% increase guided earlier.

For the second quarter of fiscal 2016, the company envisions earnings per share to lie in the band of 62–72 cents. The current Zacks Consensus Estimate is pegged at 78 cents per share. The company anticipates comps growth to range from -4% to -1% in the quarter.

Zacks Rank & Key Picks

DICK’S Sporting currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Marinemax Inc. (NYSE:HZO) , Cabela's Incorporated (NYSE:CAB) and ULTA Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) , each with a Zacks Rank #2 (Buy).

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