Dick’s Margin Improves in Second Quarter

| About: Dick's Sporting (DKS)
This article is now exclusive for PRO subscribers.

Dick's Sporting Goods Inc. (NYSE:DKS), an authentic full-line sporting goods retailer, posted impressive second quarter 2010 results, ended July 2010, on the heels of higher sales and improved margins. Quarterly earnings climbed to 43 cents a share from the year-ago level of 36 cents and comfortably outpaced its earnings guidance in the range of 37– 39 cents a share. Dick’s also surpassed the Zacks Consensus Estimate of 41 cents per share.

A 5.7% increase in consolidated comparable-store sales (comps) and opening of new stores aided the 8.8% year-over-year increase in total revenue, which climbed to $1,226.1 million.

The comps growth was driven by a 5.6% rise in Dick's Sporting Goods store sales, a 2.9% increase in Golf Galaxy stores, coupled with a 28.0% growth in e-commerce.

Gross profit came in at $360.1 million, up 16.2% year over year, attributed to higher merchandise margins and a favorable sales mix. Operating profit shot up 38.1% year over year to $88.1 million, helped by lower pre-opening expenses.

Management’s continued achievements in traffic driving, marketing and merchandising strategy, inventory management and expense controls aided the company in delivering outstanding results.

Financial Aspects
Dick’s ended the quarter with cash and cash equivalents of $278 million and long-term debt of $141.8 million. The debt-to-capitalization ratio was approximately 10.7%.

Store Update
In the reported quarter, Dick’s opened 1 and remodeled 3 Sporting Goods stores, bringing the total to 425 stores in 42 states. Golf Galaxy store count in 31 states remained at 91.

Dick’s plans to open 12, relocate 1 and remodel 7 Dick's Sporting Goods stores in the third quarter 2010. The company also targets to close 12 underperforming Golf Galaxy stores in the upcoming quarter.

In fiscal 2010, the company expects to open 26, relocate 2 and remodel 11 Dick's Sporting Goods stores. Dick’s also has plans to open 2 new Golf Galaxy stores, and close 12 underperforming Golf Galaxy stores in 2010.

For third quarter 2010, Dick’s expects earnings per share to be between 15 cents and 16 cents and comps to rise between 1% and 2%.

For full year 2010, management expects earnings in the range of $1.46 to $1.49 per share, while comps are expected to increase in the range of 4% to 5%.

Dick’s expects to incur capital expenditure of approximately $145 million on a net basis in 2010.

Our Recommendation
Pittsburgh-based Dick's Sporting Goods is a full-line sporting goods retailer offering a broad assortment of brand name sporting goods equipment, apparel and footwear in a specialty store environment.

Dick’s remains the dominant player in the industry with significant store expansion and potential share gain opportunities in the U.S. We remain optimistic about the company’s competitive position, quality of management and consistency of earnings growth.

However, the sporting goods market is highly competitive in nature and Dick’s failure to compete effectively in terms of price, quality or product will hamper growth potential. The company faces competition from Foot Locker Inc. (NYSE:FL) and Wal-Mart Stores Inc. (NYSE:WMT). Moreover, a weak economy will likely continue to weigh on the company’s profitability in the long term.

Dick’s currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.