Dick's Sporting Goods (DKS) is one of those companies that does not seem to be able to catch a break. In December, I wrote an article which covered the main threats to Dick's investors. Back then, the company was dealing with declining sales and pressure on margins. In addition, we started to see what I called 'peak consumer sentiment'. In this article, I once again do not have many positive things to say, unfortunately. The stock remains a case of 'stay as far away as you can'.
Source: Dick's Sporting Goods
The Trend Continues
All things considered, I am staying away from the stock. I think one might consider to go long once consumer sentiment starts gaining upside momentum again. At this point, I think the mix of weak retail sales, falling comps and peaking consumer sentiment are a reason to stay far away from the stock.
The fourth quarter continued what started in the third quarter. Sales were down 6% to $2.49 billion, which is more or less in line with expectations of $2.48 billion. Sales growth has been in a decline since the growth peak of Q4 in 2016 when sales growth hit 11%.
Same-store sales declined by 2.2% on a 13-week to 13-week comparable basis. Back in Q4 of 2017, comps were down 2.0%. The good news is that the omni-channel development goes in the right direction as e-commerce sales were up 17% in the fourth quarter. Online sales account for 23% of all sales, which is up 400 basis points compared to Q4 of 2017. The company also ended the year with 729 stores, which is up from 716 at the start of the year. This improvement was done in the first three quarters as the fourth quarter did not see any new store openings.
The bigger picture shows that sales continue to roll over after an uninterrupted expansion since the early 2000s. Even the great recession did not cause a sales decline. EBITDA margins are already in a downtrend since 2014 when general economic growth started to decline. Unfortunately, margins did not recover like the general economy in 2016. Rising input prices and a tough retail environment caused margins to suffer.
That's why adjusted EPS was not able to grow in Q4. Growth declined to -12% after 2 quarters with strong, double-digit EPS growth. EPS continues to be volatile, and I am afraid that the trend continues to be down. Source: Estimize
Dick's own 2019 outlook is not 'that bad', to be honest. Full year EPS is expected to come in between $3.15 and $3.35 compared to $3.24 in 2018. Same-store sales are expected to rise between 0% and 2% compared to an increase of 3.1% in 2018. Total sales will be supported by 7 new stores in 2019.
So, why do I believe that the pressure on the company is going to continue? The most important reason is a reason I already discussed in my previous article: peak consumer growth. However, in this article, I am showing an updated graph of Michigan consumer sentiment which shows that peak growth has turned into growth slowing.
I wonder if Dick's is able to keep same-store sales growth close to 2% with consumer sentiment being in a decline. The same goes for general economic growth, as I discussed in this article.
I am sure that traders were thinking the same when they punished the stock this month after a very strong stock price move in the first two months of this year. A PEG ratio of 27 perfectly shows that long-term expectations are bad, and I do not think that the PE ratio of 10.8 is a reason for traders to buy at this point.
All things considered, I am not short Dick's. Management is not the reason the company's stock is down. It's the fact that consumer growth is peaking, while margins are already in a declining trend since 2014. It gets increasingly difficult to grow bottom-line earnings. The fact that sporting stores had a 12% sales decline in December pretty much confirms this.
My advice is to stay on the sidelines as the risk/reward ratio continues to be terrible. I do not see a sustainable uptrend unless consumer fundamentals start to improve again. I would not be surprised if the stock were to re-test the 2017 lows over the next few months if economic indicators don't start to bottom until the start of the summer.
Once we are getting a turnaround, I think I am going to buy a stake in this company. Until then, it's best to wait on the sidelines.
Thank you for reading my article. Please let me know what you think of my thesis. Your input is highly appreciated!
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.
Additional disclosure: Disclaimer: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.