Dick's Sporting Goods: Likely To Benefit From Strong Retail Trade Data

| About: Dick's Sporting (DKS)

Summary

Retail trade data for the sporting goods, hobby, book and music store category is showing very strong year over year sales increases.

These aggregate strong retail sales figures should help Dick's Sporting Goods weather the storm of increased competition amongst sporting goods retailers.

The low valuation metrics and recently announced share buyback program should also help Dick's share price in the coming months ahead.

A slew of recent articles from Seeking Alpha authors has suggested that Dick's Sporting Goods (NYSE:DKS) should be sold in its recent strength.

Respected author Josh Arnold had an article published recently suggesting that the rally in shares is way over done and although he's usually been bullish on the shares, he feels that there are too many headwinds to justify its current price.

The folks at Adelphi Venture Capital wrote on April 6th that they have sold their position in Dick's Sporting Goods after it rallied 30% from when they recommended it in a published article on January 12th.

Here is a chart of the shares over the last 12 months:

Strong Retail Trade Data

I could not help but notice the very strong retail sales data that has come from the rather mixed category of: sporting goods, hobby, music and book stores.

Retail sales data released today by the U.S. Census Bureau for this sector showed a not seasonally adjusted increase in sales of 8.12% for March Vs. last year.

For the first quarter of 2016, sales are estimated to be up 8.22%. This is the best year over year percent increase in this sector since 1994!

Click to enlarge

Low Expectations

What's good about the current situation is that the sentiment for Dick's is that there are low expectations.

Credit Suisse recently warned that the sporting goods sector is too crowded currently.

In the recent Q4 2015 earning conferance call held on March 8th, CEO Edward Stack offered guidance for 2016 that included same store sales expectations to be flat to 2% growth.

Analysts expect aggregate sales, which includes e-commerce sales and new store sales, to be up 6.5% in Q1 of 2016 ending April 2016.

With retail trade figures coming out of the sporting good sector being as strong as they are, perhaps Dick's is participating and can beat the low expectation for sales growth or at least come in on the higher end of estimates.

Good Valuation Metrics

What I find attractive about Dick's Sporting Goods is the low price to book valuation of 2.92. Book value is 15.22 per share while shares currently trade at 44.75.

It has a trailing net profit margin of 4.96% and earnings on assets of 9.49% which is healthy.

The forward P/E for 2016 is about 15 based on a 44.75 share price and earnings per share guidance of $2.85-$3.00 per diluted share for fiscal 2016.

Recently Announced Share Buyback Program

On March 21st, Dick's announced a $1 billion 5 year share buyback program. This is consistent with previous share buyback programs. From their balance sheet, Dick's shows to have spent a little over $1 billion on share buybacks.

Conclusion

Dick's Sporting Goods is a company with sales of over $7 billion and has a proven track record of paying dividends and buying back shares all without gutting its balance sheet.

I think that expectations are very low and perhaps the surprising strength in the retail trade data may prove to allow for Dick's to beat the current expectations and its share price can continue to rally.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.