Dick's Sporting Goods: Close Look At Recent Earnings

As background information to the conference call for Dick's Sporting Goods (DKS), I will provide the earnings and revenue estimates, as well as some other quick financial metrics, all reported by Yahoo! Finance.

Background

Source: Yahoo! Finance: DKS Analyst Estimates

Average Earnings Estimate (Current Quarter: Jan-07): 1.15;

Average Earnings Estimate (Next Quarter: Apr-07): 0.28;

Average Earnings Estimate (Current Year: Jan-07): 1.97;

Average Earnings Estimate (Next Year: Jan-08): 2.40;

Average Revenue Estimate (Current Quarter: Jan-07): $997.15M;

Average Revenue Estimate (Next Quarter: Apr-07): $772.87M;

Average Revenue Estimate (Current Year: Jan-07): $3.09B;

Average Revenue Estimate (Next Year: Jan-08): $3.59B

Source: Yahoo! Finance: DKS Key Statistics

Forward P/E (fye 28-Jan-08): 22.99;

PEG Ratio (5 year expected): 1.10;

Enterprise Value/EBITDA (ttm): 12.074;

Return on Assets (ttm): 8.27%

Return on Equity (ttm): 5.99%;

Short Ratio (as of 12-Feb-07): 5

Updated Values

Using the company's press release, I will update some values:

Earnings (Current Quarter: Jan-07): 1.20;

Earnings (Current Year: Jan-07): 2.03;

Revenue (Current Quarter: Jan-07): $1,026.3M;

Revenue (Current Year: Jan-07): $3,114.2M;

Earnings Guidance (Next Quarter: Apr-07): 0.35 – 0.38;

Earnings Guidance (Next Year: Jan-08): 2.37 – 2.40

In its financial information, Dick's noted that the fourth quarter 2006 and fiscal 2006 each contained one additional week compared to 2005. Comparable store sales on an even 13 week basis for fourth quarter 2006 increased by 2%. The company also gave comparable store sales forward guidance for 2007 of 2% for Dick's Sporting Goods Stores. The 2% value seems low given that it just matches inflation—no real growth, that industry historical trends are 3%, and that comparable sales growth for 2006 was 6%. If Dick's modeling of comparable sales increases is low, one can also expect that its revenue and earnings guidance are also low.

Dick's in its defense, however, mentioned that it benefited from the Colts Bears Superbowl. As cited in the conference call, if two teams such as San Diego and Seattle were to play, Dick's would not benefit as it does not have stores in either of those locations.

The company plans to open 45 new Dick's stores and 17 new Golf Galaxy stores in 2007, with about one-third located in new markets and two-thirds being infills. The company finished 2006 with 294 stores. Dick's mentioned on the conference call that because it is a desired retailer, it gets the opportunity to view most of the new mall locations.

Financial Sheet Metrics

I will provide some quick bullet points as follows:

Gross margins: $320M, increased 86 basis points (bps) to 31% of sales;

Key driving factors: expanded merchandising margins, leveraging of store occupancy, and freight and distribution expenses;

SG&A: $207M was 19.9% of sales, 10 bps more than last year's fourth quarter;

Inventory: $641 compared to $536 one year ago;

On a per square foot basis, 4.9 higher than 4Q 2005, but lower on the same week in 2005 after taking into consideration 13 weeks versus 12 weeks;

Capex is expected to be $115M for 2007 compared to $95 in 2006;

Operating income for 4Q was $115M; up $27 million or 31% after adjusting for stock options;

Net income for 4Q was $68M, up 33% after adjusting for stock options.

General Commentary

Under Armour, Inc. (UA) will be opening concept stores within Dick's Sporting Goods stores. The numbers of stores will be meaningful—in other words, the impact of Under Armour should move the needle. Under Armour will continue to give Dick's discounts but it likely to reduce its discounts to Dick's competitors.

Golf Galaxy, while important strategically, was not that important in terms of sales and net income. Analysts were probing to determine the contribution from Dick's and Golf Galaxy. The company reminded the analysts that Golf Galaxy contributes less than 10 percent of revenue and earnings. Golf Galaxy is anticipated to be slightly accretive this year of about $0.02 per share.

The company has found a new CFO but has not announced that individual yet. Investors should expect an announcement within two week's time. I agree with Merrill Lynch in that management's outlook seems conservative, but I am more bullish than Merrill Lynch in my stock price outlook. Merrill Lynch has a stock price target of $58 while I believe that the stock could hit the low $60s. I am basing my outlook on strong earnings growth of 18+, ability to continue to expand the footprint while continuing to infill, and strong management.

I note that Dick's closed up yesterday $0.55 to $54.44 for a gain of 1.02%. This is a strong performance in light of the Dow selling down 1.97%; S&P down 2.04%; and NASDAQ down 2.15%.

The following is an editorial comment. As an investor, I would like to see Dick's provide its quarterly financial press release as an 8-K filing in a timely manner (I do not see it yet in 10KWizard.com) and provide a transcript of its conference call on its website or sponsor Seeking Alpha to provide transcripts. I find transcripts are a valuable resource when analyzing companies.

Overall, I continue to be impressed with Dick's Sporting Goods. I have held the stock for nearly two years and am happy with the results.

Disclosure: I am long Dick's Sporting Goods stock.

DKS 1-yr chart