DICK'S Sporting Goods Q2 Earnings: Push Through The Pain

Summary

• DICK'S Sporting Goods stock plummeted more than 24% after missing revenue and earnings guidance for Q2 and revising earnings guidance down for the fiscal year.
• Despite the drop, the company's revenue increased by 3.6% YoY and comparable store sales improved by 1.8%.
• DKS stock is trading at an attractive valuation, with a forward P/E multiple of 9.8, and other pricing metrics looking attractive.
• DICK'S also has attractive long-term growth prospects, and it is actively buying back stock.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

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DICK'S Sporting Goods Q2 earnings results

Aug. 22 proved to be a very painful day for shareholders of sporting goods retailer DICK'S Sporting Goods (NYSE:DKS). After announcing financial results covering the second quarter of the company's 2023 fiscal year, shares plummeted more than 24%. This decline was driven by the inability of management to match the revenue and earnings guidance forecasted by analysts for the quarter. On top of this, shares were punished because of a downward revision in guidance for earnings for the entirety of the 2023 fiscal year. Although this is a steep drop and might normally be indicative of significant fundamental weaknesses, my overall opinion on the matter is that the market has significantly overreacted. Even though it's true that the company is less appealing than it was prior to this downward revision, shares look incredibly cheap on an absolute basis and likely have attractive upside as a result. Because of this, I have decided to keep the company rated a "buy" at this time.

Putting the pain into perspective

It can be frustrating, especially if you own shares, to see shares of that company plummet to the extent that DICK'S Sporting Goods experienced on Aug. 22. During periods of time like this, it might seem as though the world is collapsing. But it's during these times that investors would be wise to look at all of the data in the most unbiased way possible. After all, we're not dealing with only numbers on a piece of paper. The numbers translate into real world data that paints a picture of a large and complex organization.

Author - SEC EDGAR Data

As an example of this, let's take revenue for the quarter. According to management, sales came in at $3.22 billion. It's true that this was $20 million lower than what analysts forecasted. Although that's far from ideal, it's important to note that revenue came in 3.6% above the $3.11 billion management reported for the same quarter of last year. One of the drivers behind this increase was a 1.8% improvement in comparable store sales. This actually marks a turnaround compared to the 5.1% drop in comparable store sales seen the same time last year. So yes, revenue fell short of expectations. But that same revenue figure that disappointed market participants still managed to prove that the company continues to grow even as the number of locations that it has in operation remained flat at 860.

On the bottom line, the situation is a little more complicated. Earnings per share for the quarter came in at $2.82. In addition to missing the expectations set by analysts by $0.99 per share, earnings also fell short of the $3.25 reported in the second quarter of 2022. This translated to net profits dropping from $318.5 million to $244.3 million. There were multiple drivers behind this year-over-year drop. For starters, according to the CFO of the company, the biggest surprise for the quarter involved inventory shrinkage. This largely centers around what management considers to be organized retail crime that came in "higher than" the company anticipated. The company discovered this when it performed a physical inventory count for the quarter, which the business typically only does once per year before the school season begins. All combined, shrinkage hit the company's gross margins by 0.85%. There are other factors that go into shrinkage, but management did not break out how much those were versus how much they believed was related to theft. In addition to this, the firm saw its gross profit margin dropped from 36% to 34.4%, in large part because of outdoor merchandise inventories being aggressively marked down.

Author - SEC EDGAR Data

The drop in net profits had a negative impact when it came to the company's cash flow figures for the most part. Although operating cash flow shot up from $162 million to $741.9 million, the picture looks different when we adjust for changes in working capital. Doing so, we would see that cash flow declined from $432.6 million to $353.6 million. Meanwhile, EBITDA for the business fell from $546 million to $398.9 million. For context, I also provided, in the chart above, financial results covering the first half of 2023 compared to the first half of last year. As you can see, the second quarter on its own was instrumental in significantly worsening the company's bottom line on a year-over-year basis.

DICK'S Sporting Goods

If missing on the top and bottom lines were all the things that occurred that were negative, shares likely would not have fallen as much as they did. Unfortunately, that was not the case. Management also reduced guidance for the 2023 fiscal year in its entirety. It's true that comparable store sales guidance is expected to remain unchanged compared to what management stated it would be in the first quarter. However, earnings per share are now forecasted to come in at between $11.33 and $12.13. Adjusted earnings, meanwhile, are forecasted to be between $11.50 and $12.30. By comparison, prior guidance for both GAAP and adjusted earnings called for profits of between $12.90 and $13.80 for the year.

It's important to recognize that baked into all of these figures is a $0.20 per share benefit that the company gets because this year has an extra operating week to it. Stripping this out and taking the midpoint of guidance, we should end up with adjusted earnings for this year of $1.02 billion. That compares to the $1.16 billion that management's prior guidance translated to. No guidance has been provided when it comes to other profitability metrics. But if we annualize the results seen so far, we would expect adjusted operating cash flow of $1.45 billion and EBITDA of $1.49 billion.

Author - SEC EDGAR Data

With these figures, it's easy to value the company. As you can see in the chart above, the stock is trading at a forward price to earnings multiple of 9.8. The forward price to adjusted operating cash flow multiple is 6.9, while the forward EV to EBITDA multiple should be 6.4. These numbers are each a bit higher than what we get using data from 2022. On an absolute basis, however, I would argue that they are very attractive. In the table below, I also decided to compare the company to five similar firms. On both a price to earnings basis and on an EV to EBITDA basis, three of the five companies ended up being cheaper than DICK'S Sporting Goods. But when you look at the picture through the lens of the price to operating cash flow approach, only one of the firms ended up being cheaper.

Company	Price / Earnings	Price / Operating Cash Flow	EV / EBITDA
DICK'S Sporting Goods	9.8	6.9	6.4
Academy Sports and Outdoors (ASO)	7.6	8.5	5.1
Big 5 Sporting Goods (BGFV)	22.3	24.4	6.5
Hibbett (HIBB)	4.3	25.0	3.0
Vista Outdoor (VSTO)	3.9	3.7	20.7
Johnson Outdoors (JOUT)	13.2	8.5	5.9

Click to enlarge

There are a few other points that I would like to discuss before we conclude this. Even though the second quarter was not particularly pleasant and guidance has been revised lower, this did not stop management from buying back stock. Total share buybacks so far this year have come out to $260.4 million, with $202.7 million of it occurring in the second quarter alone. That still leaves $1.2 billion in buybacks under the current share repurchase program. And that brings me to the second thing, which is the company has a fantastic balance sheet. Even after covering all debt, the firm would have cash and cash equivalents of $419.1 million. That is a great position to be in, especially if you are worried about economic conditions worsening from here.

DICK'S Sporting Goods

It would also be helpful for us to focus a bit more on the long-term picture as well. The fact of the matter is that this is a large and growing market that management is in a great position to capitalize on. The 860 stores that the company has spread across 47 states enable it to reach out to the 150 million or more "athletes" across the nation that are in its database. And what's really exciting is that, as the population grows, more athletes come into existence. Management estimated that 7 million new athletes came onto its database in 2022 alone. Although the company sells a wide variety of goods, it believes that the market for footwear, apparel, and what it calls "hardlines" alone is worth $140 billion. And at this moment, DICK'S Sporting Goods has only an 8% market share. Given these stats, I personally would prefer that management prioritize additional growth over the share buybacks that it is engaging in. But either way, the firm is doing well and has demonstrated significant potential.

DICK'S Sporting Goods

Takeaway

I understand why investors and market watchers might be scared or disappointed when it comes to the performance reported by DICK'S Sporting Goods. Financial results were absolutely a letdown. But when you look deeper into the picture, you see a company that's still growing. It's still generating significant amounts of cash flow, and it has a robust balance sheet that is enabling it to buy back a lot of stock. It's true that the firm is not as attractive as it was previously. And it's clear that management needs to do a better job of addressing costs, including inventory shrinkage. But when you consider how cheap the stock is, and you look at all of the other aforementioned positives about it, I do think that a "buy" rating still make sense at this time.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[trusthouse]

The company is still hugely overvalued compared to peers.

3.6% YoY on top line is not good as prices have risen sharply in the meantime. I'd like to know how many shoes they sold YoY, it would be more relevant, and it's probably negative. Others might be even worse, but it doesn't make DKS good.

This doesn't look good going forward. The change in guidance is just a beginning. Buying now would be a big mistake IMO.

Covid era sales will never come back, and post-covid sales are biased because of inflation. At some point, I expect a dividend cut as margins are suffering. Something like a 50% drop looks reasonable before one accumulates again.

The question for now is rather what are the support levels to cover one's short.

[Clark158f1]

I like DKS and at $ 110 I'm a buyer.

After reading the above the CFO is below standard if they are only taking inventory annually. He has no idea when the inventory went missing and possibly waited an entire year to take corrective action.

Where I used to work, as a Forutune 500 CFO, I would have been fired if I had handled it in the same manner.

[Daniel Jones]

@Clark158f1 I agree. They should be doing it at least quarterly in my opinion, though I have never been in that role, so I don't know best practices.

[Clark158f1]

@Daniel Jones

Or he could cycle count....either way you don't wait a year to find you have a problem.