DICK’S Sporting Items: Powerful Setting Creates Alternative (NYSE:DKS)


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The retail sector faced a difficult start to the year as stiff competition created too high a hurdle for businesses. DICK’S sporting goods (NYSE:DKS) has fallen into the trap of leading before far too high for the year, although figures are slightly above pre-Covid levels. my investment thesis is ultra-bullish on this seedy sporting goods stock with a vastly superior deal.

Hard comps

DICK’S reported the truly amazing combination of comp sales falling 8.4% for the quarter ended April while net sales of $2.7 billion were up 41% from 2019 levels. Investors need to review the stock for earnings since 2019.

The market clearly has to ask itself where business is stabilizing compared to 2019 levels. The sporting goods retailer is now much improved and the market should start evaluating the higher earnings base with stronger valuation multiples. DICK’S no longer donates market shares to online retailers such as Amazon (AMZN) due to a strategy of using branches as distribution centers.

DICK’S FQ1’22 presentation

DICK’S now uses stores to close 90% of sales. The retailer fulfills 70% of online orders through its store network, delivering goods to consumers much faster than shipping from a random distribution center. In many cases, customers order online and collect in store or curbside, providing a service that Amazon cannot provide.

This concept really changes the view of high inventory levels at store locations. As DICK’S and other retailers were forced to adjust their business models during the Covid lockdowns, the company quickly switched to in-store delivery of goods, including curbside pickup.

For this model to be successful, the local store needs the inventory to deliver goods. A retailer who has the product in a multi-state warehouse is of no use to a consumer who wants the product that day.

The stock initially tumbled due to the EPS cut in fiscal 2022, but the market was also very concerned about higher inventory levels. Inventory levels reported by DICK increased over 40% quarter-on-quarter to $2.8 billion. The company had inventories of just $2.1 billion as of early May 2019, and CEO Lauren Hobart explained the inventory situation on the Q1 2019 earnings call as follows:

However, I want to be very clear that we are not seeing any significant trends that differ from what we saw in the first quarter and we believe our inventory is actually very healthy at up 40% and we are very happy with that . In fact, there are areas where we would have more if we could have more. There have been some disruptions in terms of inventory inflow. However, we expected certain categories like fitness and outdoor gear to normalize this year. And they have normalized as expected. We are still chasing products in certain categories and our inventory is healthy. We do not expect any appreciable devaluation risk.

Of course, the market is concerned that the management team is a little too positive about the ability to handle higher inventor numbers, even though amounts adjusted for higher sales numbers are roughly neutral. In the April quarter, DICK’S increased merchandise margins by 143 basis points from 2021, which is a positive indication that management is wanting more product in certain categories while avoiding discounting.

The store has become much more attractive as a result of the changeover to new sales concepts and ideas along the lines of the “House of Sports” and “Going, Going, Gone” store concepts. DICK’S is now busy innovating new business concept ideas and delivery methods. The dealer no longer sleeps at the wheel and gives away market shares.

conservative leadership

Dick’s lowered full-year guidance to adjusted earnings per share of $9.15-$11.70 from $11.70-$13.10 due to consumer pressure and unobserved changes from the previous plan. After all, the sporting goods retailer just surpassed first-quarter EPS targets of $2.53 by $0.32 for a strong start to FY22.

guide foil

DICK’S FQ1’22 presentation

The company will take advantage of higher sales and margins to double EBT margins to 10% vs. 2019 while continuing to grow EPS due to lower share count. DICK’S bought back shares at much higher levels, but the company still managed to lower the number of shares in the process.

The company had 92 million shares for FQ1’22 compared to 97 million for the same period last year. DICK’S forecasts that $300 million will be used for share buybacks this year to reduce the FY22 share count to approximately 88 million.

Note that DICK’s management suggests that the company presented a conservative EPS guidance for the year averaging $10.43 per share. If a recession hits, DICK’S should not have to cut guidance again as long as there is upside in a stronger economic scenario.

Bring away

The key takeaway for investors is that 2022 financial results appear very difficult to predict. Inflationary pressures and recession fears could easily cause consumers to hold back on their purchases, but the stock looks far too cheap here. DICK’S now has a much more powerful profit machine due to better operations.

Investors should take advantage of further weakness to add to the stock despite knowing that the rest of the year could be very volatile.