Dick's Sporting Goods (DKS) reported terrific first-quarter results Tuesday that reflect the company's continued operational excellence. Sales grew 15% compared to the first quarter of 2011, driven by same store sales expansion of 8.4% (including 12.6% same store sales growth at Golf Galaxy). While some of the strength can be attributed to unseasonably warm weather and the "pull-forward" of revenue from the second quarter, we are increasing the high end of our fair value range to $46 per share on slightly more optimistic near-term forecasts. Still, we think shares are just a bit expensive at current levels based on our DCF valuation process.
In addition to strong top-line growth, Dick's Sporting Goods increased earnings per share by over 50% and raised its full-year bottom-line guidance to between $2.45 and $2.48 per share, representing an annual increase of over 20%. Management also declared a 12.5 cent quarterly dividend, which we view to be an optimal way to return cash to shareholders relative to buybacks given the stock's slight overvaluation (our dividend methodology). If strong same-store-sales trends continue, we think this full-year guidance could prove conservative.
Though Amazon (AMZN) intends to offer more sporting goods online, Dick's Sporting Goods remains on track to open 40 stores this year and grow its online business. We think the risk is that Dick's Sporting Goods becomes the Best Buy (BBY) of sporting-goods retail, or the Amazon showroom. People will still want to try on pants, mitts, and dribble basketballs, but we fear that consumers might simply use their iPhones (AAPL) to order the products via Amazon if the price is better. Of course, this trend is still in its infancy, and though Eastbay (FL) has been selling competing products online for more than two decades, online has yet to take a dominant position in sporting goods retail.
Management dismissed Amazon's presence on the basis that Nike (NKE) and Under Armour (UA) do not sell to them directly, which prevents Amazon from getting premium product. We completely agree, but again, this could certainly change.
Additionally, management provided some insight on the company's investment in U.K. sports-retailer JJB Sports. We think this move allows Dick's Sporting Goods to buy a firm operating in a challenged European economy on the cheap and clear the path for long-term international growth. Unlike Under Armour's foray into Europe, this investment will allow Dick's Sporting Goods to gain some critical market knowledge before it makes a greater push internationally.
Though we think Nike, Under Armour, and North Face (VFC) will continue to drive strong sales and earnings at Dick's Sporting Goods through the course of 2012, we think Amazon and online retail (in general) is a huge unknown for the company. As we stated earlier, online retail has been around for some time, but not in its current "mobile" iteration which allows customers to order products from literally anywhere in the world. And with economic growth still rather moderate, we feel consumers will continue to seek bargains, especially on premium goods.
With Dick's Sporting Goods trading at about 20 times our 2012 earnings forecast, we don't think the shares are attractive from a relative standpoint either. Nike trades at a lower multiple, has a better DCF valuation (price/fair value ratio) and has several catalysts in the back half of the year to drive the shares higher. We think Nike is a much better idea for investors looking to gain exposure to the athletic retail space.