Why Is Dick's (DKS) Down 16.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Dick's Sporting Goods (DKS). Shares have lost about 16.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Dick's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

DICK'S Sporting Q4 Earnings & Sales Beat

DICK'S Sporting delivered robust fourth-quarter fiscal 2019 results, wherein earnings and sales surpassed the Zacks Consensus Estimate and grew year over year. The company delivered strong sales results despite the shorter holiday season this year as well as challenging weather that hurt its cold weather categories. Further, its results gained from its focus on improving service, experience and marketing across all channels.

The company’s top line reflected the impacts of a decline in hunting category sales due to the removal of the category from 125 stores in the fiscal fourth quarter. However, driven by its hunting space optimization efforts, DICK’S Sporting notes that the stores delivered positive same-store sales (comps) results even during the peak hunting season that falls in the fourth quarter. So far, the company has removed the hunting business from 135 DICK’S Sporting stores.

Taking its space optimization efforts a step forward, the company plans to remove the hunting department from nearly 440 additional DICK’S Sporting stores in the first half of fiscal 2020. This will leave the hunting business in only 12% of its stores.

Q4 in Detail

In the fiscal fourth quarter, DICK'S Sporting reported earnings of $1.32 per share, surpassing the Zacks Consensus Estimate of $1.22. Additionally, the bottom line rose 23.4% from the year-ago quarter’s number.

Net sales of $2,608.7 million grew 4.7% year over year and surpassed the Zacks Consensus Estimate of $2,549 million. Consolidated same-store sales rose 5.3%, driven by higher average ticket and transactions. Further, same-store sales were aided by growth in each of its three primary categories — hardlines, apparel and footwear. E-commerce sales grew 15% year over year, which was 25% of net sales in the reported quarter compared with 23% in the prior-year quarter.

Adjusted gross margin expanded 73 basis points (bps) to 28.6% in the quarter under review. This was due to a 14-bps rise in merchandise margins and 62-bps leverage on occupancy costs. However, this was partly negated by costs related to the opening of two new dedicated e-commerce fulfillment centers. Adjusted SG&A expenses, as a percentage of sales, increased 77 bps year over year to 22.93%, thanks to rise in incentive compensation expenses and higher marketing expenses related to the successful multi-channel holiday campaign.

Financial Aspects

DICK'S Sporting ended fiscal 2019 with cash and cash equivalents of $69 million, nearly $224 outstanding borrowings under its $1.6-billion revolving credit facility and total stockholders' equity of $1,731.6 million. Further, total inventory rose 21% year over year as of Feb 1, 2020, driven by investments to support key growth categories. In fiscal 2019, the company generated operating cash flow of $404.6 million. Moreover, total capital expenditure amounted to $217.5 million (on a gross basis) and $179.5 million (on a net basis). The company expects inventory to increase in a high-single-digit rate by the end of the fiscal first quarter and then moderate at the end of the second and third quarters. Consequently, it expects inventory in fiscal 2020 to be in line with the fiscal 2019 level.

Dividend and Share Repurchases

During fourth-quarter fiscal 2019, the company bought back nearly 759,000 shares for $36.1 million. This brings total share buybacks in fiscal 2019 to 11.1 shares for 402.2 million. Consequently, the company now has roughly $31 million under its standing authorization, extending through 2021. On Jun 12, 2019, its board approved an additional five-year share-repurchase program of up to $1 billion of its common stock. On Mar 6, management raised its quarterly cash dividend by 13.6% to 31.25 cents per share. The dividend is payable Mar 27, 2019, to its shareholders of record as of Mar 20.

Store Update

During the reported quarter, the company closed seven DICK'S Sporting Goods and one Golf Galaxy store. As of Feb 1, 2020, DICK'S Sporting operated 726 DICK'S Sporting Goods stores across 47 states, 94 Golf Galaxy stores in 32 states, and 27 Field & Stream stores in 16 states. In fiscal 2020, the company plans to open nine DICK’S Sporting and six Golf Galaxy stores. Meanwhile, it expects 17 relocations for the fiscal year.

Guidance

Management stated that its guidance for fiscal 2020 takes into account the encouraging momentum in its business and the aggravating coronavirus situation across the world. Considering that some supply-chain disruptions will start affecting operations in the fiscal second quarter, the low end of the company’s guidance has been conservative. For fiscal 2020, DICK'S Sporting envisions earnings per share of $3.60-$4.00. Further, consolidated comps are projected to be flat to up 2%. Pre-tax margin is expected to be between a decline of 30 bps and a slight increase year over year. Meanwhile, the higher end of the gross margin guidance is nearly flat. Moreover, the company expects SG&A leverage for fiscal 2020. Effective tax rate is projected at 25.5%. Management expects capital expenditure of $235-$295 million (on a net basis).

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -59.39% due to these changes.

VGM Scores

Currently, Dick's has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Dick's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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