DICK’S Sporting Items Inventory: It is All Seasons For Capital Appreciation (NYSE:DKS)

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DICK’s sporting goods (NYSE:DKS) had an incredible year as shares are still up 41.89% despite falling -25.15% from their previous peak of $142.78 in 2021. DKS shares have been cooling, but the stock looks like it could be warming up again. One thing I never understood is why do short sellers aim hard? According to MarketBeat as of 02/28/22 20.4% of the total DKS shares were sold short while Seeking Alpha shows that short interest has risen to 22.38%. When I look at the companies with the most short sales on the market, some of them don’t make sense, and DKS ranks high on that list for me.

Contrary to what some believe, physical retail isn’t going away entirely. While it seems like e-commerce has completely dominated retail, it only accounts for about 20% of retail sales. I can’t understand why the short sellers are attracted to DKS as the finances are excellent. DKS is at rock-bottom P/E with rising sales, net income, free cash flow (FCF), and EPS while buying back huge shares. DKS has sufficient cash to repay its long-term debt. DKS shares may have cooled off during the market downturn, but this isn’t a company I want to be short on as the financials are bulletproof.

Alpha wanted

DICK’S Sporting Goods has great finances and I’m not sure why short sellers are betting against it

Let me start with this foreword, I am a shareholder of Amazon (AMZN) but I am not a shareholder of DKS. The phenomenon of e-commerce has revolutionized the shopping experience, but I still believe physical retail has a place as it serves as an experience.

income statement

Alpha wanted

Let’s start with the income statement. DKS has increased its revenue by $4.37 billion (55.18%) over the past 5 years as its revenue increased from $7.92 billion to $12.29 billion. With the turnover, the gross profit and the net profit for the year have also increased significantly. Gross profit has increased by $2.3 billion (95.34%) over the past 5 years, while DKS net profit has increased by $1.23 billion (428.84%). As DKS increased sales, gross profit, and net profit, they also increased their margins. Their gross profit margin has increased by 7.88% to 38.33%, while their profit margin has increased by 8.74% to 12.36% over the last 5 years.

DKS was able to achieve these metrics by evolving over time. DKS, unlike other retailers, has embraced the digital experience by creating a best-in-class omnichannel operating model. DKS has the largest database in youth sports as they added 16.5 million new athletes to their database in the last 2 years. DKS has evolved into a data-driven company by providing enhanced athlete experiences through multiple in-store technology experiences from running to golf. DKS is a major retail business with many partnerships between leading brands. Even though companies like Nike (NKE) have their own stores, selling their products is not a viable option due to DKS’ high traffic volume. DKS is changing the sporting experience and has become a top address for equipment and sports equipment.

experience

DICK’S sporting goods

Best of all, DKS has revamped the customer experience and has grown without destroying its bottom line. DKS has $2.64 billion in cash on the books with $1.93 billion in long-term debt, of which $0 matures in 2022. DKS could write a check tomorrow and pay off its debt. DKS has total equity of $2.1 billion on the books with only $245.9 million in goodwill out of its $9.04 billion in assets. DKS has a solid balance sheet and rewards shareholders by giving them a bigger slice of the pie through share buybacks.

Over the past decade, DKS has decreased its share count sequentially year-on-year. At the end of fiscal 2012, DKS had 123 million shares outstanding. Over the decade, DKS has been able to fuel its growth without issuing stock and killing shareholders through dilution. Over the past decade, DKS has repurchased 43.1 million shares, down 35.04% as it reduced its total outstanding shares to 79.9 million. Not many companies have been in this position, which is a testament to management’s ability to grow responsibly and in a way that benefits shareholders.

balance sheet

Alpha wanted

DICK’S Sporting Goods is trading at rock bottom valuation

The financials look great, but what about the valuation? After looking at some metrics, there’s nothing not to like. In 2021, DKS generated $147.79 per share in sales and placed the P/E at 0.72 as the market doesn’t even price DKS at a 1:1 ratio, but Mr. Market will happily post a huge P/E ratio Technology companies put multiplier on unprofitable. In 2021, DKS generated $18.27 in earnings per share, giving it a P/E ratio of 8.09. Today you pay less than 1x sales and 8.09x profits.

DKS increased its FCF and generated $1.31 billion in FCF in 2021. DKS has a market cap of $9.45 billion. One valuation metric that many don’t consider is the FCF price. I want to look at what I’m buying a company’s cash flow from. Today you pay 7.22x DKS FCF. Think of it this way: if you bought the entire company, it would take 7.22 years to generate your original investment in FCF. This is an incredibly low price considering how expensive other companies trade. For example, Block Inc (SQ) has a market cap of $82.20 billion and generates $713.5 million in FCF. SQ is trading at a price to FCF ratio of 115.21x its FCF. DKS generates almost double the FCF of SQ, but SQ is trading at 115.21x FCF while DKS is trading at 7.22x FCF. Many would argue that SQ has a lot more potential, but potential shouldn’t matter. Businesses are formed to make a profit, and when you invest in a business, you pay the present value of future cash flow. $1 FCF is still $1 FCF whether you are a tech or retail company. The Coca-Cola Company (KO) generated $11.26 billion in FCF in 2021 and trades at 23.41 times its FCF as its market cap is $263.6 billion.

financial performance

DICK’S sporting goods

DICK’S Sporting Goods is also becoming a dividend growth company

To be perfectly honest, I didn’t even know that DKS pays a dividend. DKS is currently paying $1.95 per share for an expected yield of 1.81%. DKS has a low payout ratio of 10.19% and has provided shareholders with 8 years of dividend growth. Over the past 5 years, DKS has had a dividend growth rate of 22.56%. In addition to providing a solid dividend that hasn’t been paid during the pandemic, DKS paid a large special dividend of an additional $5.50 in 2021.

I think management has demonstrated to shareholders that the dividend is an integral part of DKS stock and can be relied upon. Companies must be financially strong to pay a dividend and must accurately predict their future finances to implement a dividend growth plan. DKS has provided 8 years of dividend growth with a particularly high special dividend. This is a company that has plenty of future upside to offer as its payout ratio is 10.19%.

capital allocation

DICK’S sporting goods

Conclusion

I would like to know what the short sellers see in DKS? This is not a company in trouble, there is no debt problem and every financial metric has been steadily increasing. DKS has a strong balance sheet, can pay off its long-term debt by writing a check as its treasury more than covers the balance, and DKS has over $1 billion in net profits. Today you can buy DKS shares at a price to earnings ratio of 0.72, a price to earnings ratio of 8.09 and 7.22 times the FCF price. Not to mention, DKS pays a dividend with 8 years of dividend growth and an expected yield of 1.81%. I’m not saying there will be a short squeeze, but there’s no reason for more than 20% of the stock to be shorted. DKS looks very undervalued, has a strong balance sheet and is a cash cow. I think the perception of DKS is being misinterpreted and the stocks are primed for a rebound. I plan to open a position and add to the position in the future if it keeps going down.