Opinions
Stephen Weiss, Founder, Short Hills Capital Partners
Dick's Sporting Goods
DKS-N
BUY
Dec 31, 2021
Stock price when the opinion was issued
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Shares just slid 25% after a bad quarter. Earnings were down 23% YOY and slashed their earnings forecast 11%, but the stock was oversold. There were positives: they're gaining market share, and July sales were accelerating. Okay, margins were ugly. Excess inventory and theft were to blame. He's happy with the 3.6% dividend. He likes them unveiling House of Sports stores which include batting cages, artificial turf to try on cleat shoes and rock-climbing walls. These stores are experiences. Their golf sales tap into the rise in gold. Their new app for kids, Game-Changer, could become a major money-maker, worth over $1 billion by his research.
DKS is very cheap now at 9X earnings. The dividend of 3.6% has shown good growth. While many retailers are experiencing consumer slowdowns, DKS has a 'theft' issue. Theft is the driving force behind Dick's Sporting Goods' 23% EPS drop in 2Q and lowered guidance for the full year, as sales trends were only slightly below expectations in the quarter. Management's revised outlook for fiscal 2023 non-GAAP EPS suggests growth of about 2.5% in 2H vs. 1H's 4% decline as the retailer remains focused on maintaining elevated gross margin, implements a cost-cutting plan and expands its store footprint. Gains in 2H may be more heavily weighted toward seasonally strong 4Q vs. 3Q. The company's unchanged projection for same-store sales to be flat to 2% higher this fiscal year suggests further deceleration in 2H from 2Q's 1.8%, which marked a four-quarter low, as year-over-year comparisons get tougher. Short sellers do often 'pick on' weakness, and it is likely also a short target just for its consumer exposure, as many short sellers expect a recession. Short interest is 12% now. The balance sheet is fine, and we do not think recent issues are fatal. It is priced well, but a recovery is going to take some patience. We would consider it a HOLD.
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DKS tends to grow in the low-single digit range but shares are trading at 11X forward earnings, so this lower growth is reflected in the valuation. What DKS has done really well is with share buybacks, not being a stranger to repurchase nearly 10% of shares in some years. Cash flows are strong and we tend to prefer companies with higher growth rates in general, but we don't have a whole lot to be critical of here.
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It's insane that shares dropped 10% this morning after they reported. They reported 4.5% same-store sales growth, beating, net sales also beat as well as EPS. Margins also expanded and raised their guidance. Shares fell because they raised guidance to where the street already was looking for, and their full-year forecast implies a slowdown in the back half of the year (2.5-3.5% same-store sales growth vs. the just-posted 4.5% growth). Also, the company has been investing in long-term growth and will double-down on that investment, but that will eat into earnings. He thinks that's great, but no some investors. This pullback is a buying opportunity. Among tailwinds is their app which boasts over 6 million users.