Bull of the Day: Dicks Sporting Items (DKS)


Much emphasis has been placed on stocks lately, which have benefited from at least some of the pandemic restrictions we’ve all lived with in some form over the past 15 months. Companies that managed to stay home – including working mostly from home – were the obvious beneficiaries.

Now that vaccinations are on the rise and many restrictions have been lifted, much of that focus has shifted to “reopening” stocks – companies that provide the high-demand goods and services as millions of people rediscover those activities absent.

Dicks sporting goods (DKS) was a great “lockdown” stock, but it’s an even better “reopening” stock.

The company sells the exact gear and clothing that people want to bring back out, exercise, socialize, and just have fun. They also continue to see oversized dividends from their decision to be socially responsible. Long before “ESG” became a household name in the investment world, Dicks decided to limit or stop sales of firearms and ammunition.

Dicks had been one of the largest arms dealers in the country, and analysts and investors were right to be concerned about the potential impact of lost revenue from hunting enthusiasts.
These customers tend to be strong proponents of second amendment rights, which the measure to restrict the sale of firearms could view as an encroachment on those rights.

The decision was made in February 2018, and by the end of the year, Dick’s estimated they had lost about $ 150 million selling guns in ammunition.

It turns out that these initial investor fears were unfounded, as sales of the same stores at Dick’s have actually increased significantly.

The hunting and shooting items that Dick no longer sold actually turned out to be pretty low-margin stores – and they often went head-to-head with the country’s largest discount store Walmart (WMT).

Dick’s range of women’s and competitive athletic apparel sells in larger quantities and for higher profits than the firearm products they have replaced. This is largely due to a size benefit that Dick’s enjoys due to its sheer size. They have popular brands like Nike (NKE), Adidas and Underarmament (UA), But they also have several own brands that are exclusively available from Dick’s.

The company worked with celebrity Carrie Underwood to develop a line of women’s clothing and shoes called Calia, as well as a brand of high-performance compression sportswear called Second Skin, targeting UnderArmour’s most popular items.

It’s a powerful one-two punch. Branded goods bring customers into stores, but intense price competition and higher wholesale prices often mean lower margins on these goods. Dick’s offers its customers a choice of in-house brands and allows those customers to sell items at a lower selling price but with higher profits.

The story goes on

These bigger gains are easy to spot in a series of impressive quarterly reports. The latest results showed net income of $ 3.79 / share – 265% more than the Zacks consensus estimate.

These results were not a deviation either. They followed the simultaneous increase in sales and gross margins. Management raised its revenue guidance for the remainder of the year and analysts tried to revise their estimates upwards. The Zacks Consensus Earnings Estimate for 2021 is up more than 50% in the past 30 days, from $ 4.96 / share to $ 7.62 / share, earning Dick’s Sporting Goods a Zacks # 1 (strong buy).

Given this huge anticipated increase in earnings, DKS is currently trading at a very low 12 month price / earnings ratio of just 13X.

It’s hard not to like a company that cares about its customers and society in general, helps people live healthier and more fulfilling lives, makes industry-leading profits, trades at value stock price, and even pays a 1.5% dividend yield .

It’s hard not to like Dick’s Sporting Goods.

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