Dick's Sporting Goods: A Low Cost Structure Should Eventually Pay Big Dividends

Dick's Sporting Goods (DKS) held its first quarter 2007 conference call Wednesday. I will review the company's earnings release as well as provide commentary on the conference call.

The earnings release contained the bulk of the information discussed on the conference call. You should note that results for first quarter 2006 did not include Golf Galaxy, but results for first quarter 2007 do include Golf Galaxy from the date of the acquisition of 13 February 2007.

First Quarter Results

• Net income was $21.7M, an increase of 90% over the prior year's result of $11.4M;
  • EPS was $0.38, an increase of 81% over the prior year's result of $0.21;
• Net Sales increased 28% to $823.6M with a 2% comparable store sale increase;
• Company was pleased with sales results considering weather in Northeast and Midwest as well as shifts in holiday seasons.

Stores

• In first quarter, the company opened 15 Dick's Sporting Goods Stores and 10 Golf Galaxy stores;
• In 2007 the company plans to open 45 new Dick's stores and 17 new Golf Galaxy stores and relocate one Dick's store;
• In the second quarter the company plans to open six new Dick's stores and two new Golf Galaxy stores and relocate one Dick's store.

Full Year 2007 Financial Outlook

• Company reaffirms guidance for consolidated earnings per diluted share of approximately $2.37 – $2.40;
  • Assumes 58 million shares outstanding;
  • Represents approximately 18% increase of prior year's result of $2.03;
• Comparable store sales are expected to increase 1% – 2% compared to 6% last year.

Second Quarter 2007 Financial Outlook

• Company anticipates consolidated earnings per diluted share of approximately $0.74 – $0.77;
  • Assumes 58 million shares outstanding;
  • Represents approximately 61% increase of prior year's result of $0.47;
• Comparable store sales are expected to increase 3% – 5%.

Financials

• Gross margins increased from 27.52% to 29.68%, an increase of 216 basis points, which was partially attributable to shipping and distribution;
• SG&A rose from 0.64% to 0.86% of sales that resulted from a higher advertising spend.

General Remarks

• Company is proud of its accomplishments given the weather, holiday seasons, and weak exercise equipment sales. Sometimes holiday schedules help and other times not;
• I am not certain of this next point: The company indicated on the conference call that the debt attributable to Golf Galaxy acquisition will be gone by year-end;
• Golf Galaxy will contribute most in the second quarter, as that is the time when Golf sales are traditionally strongest;
• Private labels are providing strong wins and there is the opportunity to take private labels from Dick's to Golf Galaxy;
• Although the cool weather hurt some sales, it helped margins as the company was able to unload some winter gear with less discounting;
• While the company is focused on growth, it wants to grow in a manageable manner with growing sales at 15% and net income at 20%. Net income will grow faster as the company improves some of its internal processes;
  • I like that the company is focused on removing cost out of system while still growing. A low cost structure will pay big dividends during the next economic downturn.

Concluding Remarks

Overall, I remain pleased with the company's progress. Management is focused and disciplined. The company is hitting its targets and is growing at a sound measured rate. The company has plenty of room for expansion. Moreover, management is focused on continuous improvement to eek out further gains from its existing operations.

Because management is performing well and because there remains plenty of opportunity for expansion, I am a satisfied shareholder.

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

DKS 1-yr chart: