DICK'S Sporting Goods: Headed To New Highs

Summary

• Dick's Sporting Goods has survived the worst of the coronavirus outbreak.
• The company saw May comp sales only decline 4% while 44% of stores were closed.
• The stock is likely to get a boost from the retailer re-implementing the capital allocation plan, which includes a 3.4% dividend yield.
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DICK'S Sporting Goods (Dick's) (NYSE:DKS) reported some amazing stats along with FQ1 results. Athletic apparel demand has already surged back in part due to strong online initiatives. My investment thesis was bullish on the stock after the collapse to $31 back in March even before the coronavirus store closures pushed Dick's Sporting Goods down another 50%. The recent rebound is likely just the start as even the company is looking at repurchasing cheap stock here.

E-commerce Shift

The biggest risk to all of the brick-and-mortar retailers was the Amazon (AMZN) threat. The leading online retailer had a better online ordering and delivery process, but the one positive of the coronavirus was forcing these sometimes sleepy retailers to implement online solutions to service customers from existing stores.

Anybody wanting instant sporting goods items while trapped at home during the pandemic had the option of utilizing curbside contactless pickup at Dick's Sporting Goods stores. The retailer previously didn't have such an option and now the company has a better portfolio of solutions to address customer needs.

Dick's saw comp sales fall 29.5% during FQ1 due to store closures starting on March 18. The company quickly shifted to online sales boosting e-commerce sales 250%.

Even with stores open half the quarter that ended on May 2, the company saw e-commerce account for 39% of sales, up from 13% in the prior-year FQ1. The shift to online sales has vastly improved the guidance going forward.

More importantly, Dick's only saw comp sales for the first 4 weeks of this quarter dip 4% despite 44% of stores still closed in the period. The retailer still had 20% of stores closed on May 30. With so many stores closed during May, one has to assume the company has solid cash flows in the quarter due to reduced operating expenses while revenues remain solid.

Just in FQ1, SG&A expenses were down around 20% to $403 million despite the company spending an extra $34 million on employees. The number of days stores were closed in FQ2 should approach FQ1 levels, but Dick's Sporting Goods saw solid sales trends due to the improving e-commerce execution via pickup and delivery options. The company appears to no longer be in the game of donating market share to Amazon or other online retailers.

History Of Buybacks

Management placed an interesting statement regarding capital allocation in the earnings release. The company said that Dick's would look at resuming opportunistic share repurchases with $1,031 million still existing on share buybacks authorizations.

Source: Dick's Sporting Goods FQ1'20 earnings release

The retailer has a history of spending somewhat aggressively on share repurchases. For FY20, Dick's spent $402 million on repurchasing 11.1 million shares at an average cost of $36.40. With the current market cap at only $3.3 billion, the repurchases account for over 10% of the outstanding shares.

Ironically, the stock is right at the average repurchase price of last year despite just living through a quarter where comp sales plunged nearly 30%. With a previous dividend yield of 3.4%, the stock now offers a potential net payout yield of 15.5%. The net payout yield combines the dividend yield and net stock buyback yield to offer a comparative valuation metric.

Data by YCharts

The net payout yield for Dick's Sporting Goods is informative considering the retailer paid the FQ1 dividend, but the company has temporarily suspended payouts. With the company potentially resuming share buybacks, investors should consider the dividend likely to come back sooner rather than later.

Takeaway

The key investor takeaway is that Dick's Sporting Goods is doing far better coming out of the coronavirus shutdown than originally expected. The retailer now has a far better e-commerce strategy that actually can beat Amazon via curbside pickup. As comp sales likely turn positive when the remaining 20% of stores reopen, the company is likely to reimplement capital returns that should provide an extra boost to the stock.

Dick's Sporting Goods is likely headed to yearly highs above $50 now.

Analyst’s 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.