Dick's Sporting Goods (NYSE:DKS) is losing to the market in 2014. The stock has depreciated more than 20% this year, while the S&P 500 has gained 8%. However, is a turnaround in the cards for Dick's? The company delivered good second-quarter numbers, with earnings coming in better than Street estimates.
This was commendable, as Dick's had to face some challenges on account of weak sales in golf and hunting equipment, but it still managed to surpass earnings expectations. According to CEO Edward W. Stack, "As anticipated, the golf and hunting businesses continued to experience negative comps. However, excluding these two categories we saw significant strength in several areas, including categories that have received more space within our stores, such as women's and youth athletic apparel."
Hence, Dick's diversified interests in several areas helped it overcome the challenges that it faced in certain product categories. The company delivered an increase of 10.3% year over year in revenue to $1.7 billion, outperforming expectations.
Golfing and hunting woes
Looking ahead, Dick's might continue facing challenge in the golf business, and this is one area where investors should pay attention. To mitigate the negative impact of the golf business on Dick's top line, management has decided to sell some of its clubs. As a result, the company took a $14.3 million impairment charge on its golf trademarks, and wrote down $2.4 million worth of assets including clubs, balls, and apparel.
But, this decline is not company specific. Instead, the overall golf trend is declining in the U.S. Sports giants such as Adidas (OTCQX:ADDYY) and Nike (NYSE:NKE) are facing a similar problem in this segment. Until the last decade, golf was a popular game played by an affluent group of people, according to Bloomberg. As a result, the sport had the potential to draw strong revenue for companies in this segment with its expensive equipments. But now, with a changing lifestyle and increasing work pressure, people are not playing much golf.
Similarly, hunting is another area of concern for the sporting goods maker, although this is not as bad as the golfing sector. In the short run, Dick's does not seem to be enthusiastic about this segment. According to management, "We expect our hunting business to continue to trend down in the third quarter and then flatten out in the fourth quarter." However, strength in other outdoor sports is expected to offset the hunting decline, which is good news for investors.
Overcoming the challenges
Dick's is making the right move by restructuring the golfing business, and focusing on more profitable games such as baseball, football and mini-trampoline. It does not break out how much revenue it generates from each segment, but it is nevertheless doing well to focus on growth areas. The company has outlined a capital expenditure of $340 million for the year to improve its performance.
Apart from these two sectors, Dick's is doing well. It is focused on growth drivers, which include women's, youth initiative footwear and Field & Stream. The company is smoothly progressing with its expansion, and opened eight new stores during the quarter. This has taken its total store count to 574. According to the company, these new openings are performing well, with new store productivity of 97.8%. Looking ahead, they are expected to improve further.
As a result, Dick's forecasts an improvement in its same-store sale performance going forward. According to a company release:
"Consolidated same store sales are currently expected to increase approximately 1 to 3% in the third quarter of 2014, as compared to a 3.3% increase in the third quarter of 2013, adjusted for the shifted retail calendar due to the 53rd week in 2012.
The Company expects to open approximately 24 new DICK'S Sporting Goods stores, relocate one DICK's Sporting Goods store and remodel five DICK's Sporting Goods stores in the third quarter of 2014. The Company also expects to open seven new Field & Stream stores and one new Golf Galaxy store, and relocate one Golf Galaxy store in the third quarter of 2014."
A look at the fundamentals
The company's fundamentals are impressive. Currently, Dick's has a trailing P/E of 16.49, and its forward P/E looks even better at 14.17. The company is cheap on a price to sales ratio as well, with a metric of just 0.83. In addition, it has negligible debt of just $6.7 million, while the cash position is strong at $100 million. Moreover, despite the current weakness in a couple of its segments, Dick's bottom line is projected to grow in double digits for the next five years.
In addition, Dick's also returns a good amount of cash to investors. It currently has a dividend yield of 1.10%, and the payout ratio is quite small at just 18%. Moreover, given the fact that it generates strong cash flow, Dick's should be able to sustain the dividend. In the past year, Dick's has generated $550 million in operating cash flow. Also, the company is known for stock buybacks, repurchasing shares worth $100 million last quarter.
Apart from two underperforming sectors, rest of Dick's business is in good shape. The company's diversified end markets will allow it to mitigate the weakness in golf and hunting. Moreover, as management points out, the hunting end-market is expected to get better later in the year. Finally, the company's fundamentals appear to be in good shape, which is another reason why Dick's weak performance this year can be a buying opportunity.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.