Miosotis Jade
Usually, when I rate a company a ‘buy’, it is a testament to my belief that shares should see upside that exceeds what the broader market should experience. However, even I am sometimes surprised by how strong this upside can be. As an example, we need only look at the famous sporting goods retailer known as DICK'S Sporting Goods (NYSE:DKS). The most recent article that I published about the company came out in August of 2023. In that article, I was covering how the stock had plummeted after missing revenue and earnings guidance for the second quarter of the 2023 fiscal year. That drop of 24% was awfully painful, but I maintained that the stock was cheap and deserved attractive upside.
Since reiterating my ‘buy’ rating on the stock back then, shares have skyrocketed to the tune of 70.9%. That compares favorably to the 20.1% increase seen by the S&P 500 over the same window of time. However, this was not just a recovery from the aforementioned drop. Overall performance for the business has been great for a couple of years now. Since my first ‘buy’ rating on the stock in August of 2022, shares are up a whopping 108.5%. That is significantly above the 28.8% increase seen by the S&P 500.
Of course, no company can significantly outperform the market forever. This is especially true in the retail space because of high levels of competition and the high costs of growth. While shares are not ridiculously priced by any means and would normally be considered attractive in any other space, they are starting to look a bit pricey compared to similar enterprises. Because of this, I have decided to finally downgrade the stock to a ‘hold’. However, there is the potential for me to upgrade it again. The fact of the matter is that new data is about to come out, data covering the first quarter of the 2024 fiscal year. That's expected to be on May 29 before the market opens. If the company can generate strong performance for that time, it wouldn't be unreasonable to consider upgrading the firm again. But given where we are at today, the ‘hold’ rating is the most prudent approach to take.
Setting expectations
Fundamentally speaking, financial performance achieved by DICK'S Sporting Goods has been a bit mixed in recent years. On the positive side, revenue has seen a consistent, if modest, increase. Sales went from $12.29 billion in 2021 to $12.37 billion in 2022. Then, in 2023, we saw a nice pop higher to $12.98 billion. That move, amounting to a 5% increase year over year, was driven by two factors. For starters, the number of locations in operation did manage to grow slightly, climbing from 853 to 855. In addition to this, the business benefited from a 2.4% increase in comparable store sales. In this inflationary environment, price increases have played a large role in pushing metrics like this up. However, from 2022 to 2023, much of the increase in comparable store sales actually came from a 1.6% rise in the number of transactions, while average sales price per transaction grew by 0.8%. So even though inflation has proven to be an issue for many consumers, it hasn't deterred them from shopping at this retailer.
Author - SEC EDGAR Data
It is also worth noting that the company benefited from a couple of other things during this window of time. For starters, during the 2023 fiscal year, the business enjoyed an extra operating week compared to normal. This added $170.2 million to the firm's top line. If we remove this from the equation, revenue would have actually risen by 3.6% year over year. The final $155.4 million of the company's sales increase was attributable to the retailer’s acquisition of Moosejaw and to temporary Warehouse Sale locations that the business ran.
DICK'S Sporting Goods
Even though the general trend for revenue has been positive, the bottom line has definitely been mixed. Net income plummeted from $1.52 billion back in 2021 to $1.04 billion in 2022. Even though sales popped up quite a bit last year, net profits inched up modestly to $1.05 billion. This occurred even as the firm's gross profit margin expanded slightly. The resistance that the retailer experienced was driven largely by a surge in selling, general, and administrative costs from $2.81 billion to $3.20 billion. This included $72.8 million attributable to what management calls ‘business optimization charges’ and it is due to a $28.6 million expense involving changes to the investment values of the company's deferred compensation plans. There were other factors as well, with one example being $66 million in higher marketing expenses and $191.7 million attributable to wage increases. When you add to this the fact that pre-opening expenses jumped from $16.1 million in 2022 to $47.3 million last year, it's not a surprise that profits barely moved. In fact, the picture would have been worse had it not been for a $37.2 million decrease in interest expense thanks to a surge in interest income from the company’s net cash position.
With net profits falling, investors should not be surprised to see other profitability metrics come in mixed as well. Operating cash flow has been all over the map, ranging from a high point of $1.62 billion in 2021 to a low point of $921.9 million the year after that. Last year, this metric was $1.53 billion. We saw a similar trend, though of a different magnitude, when it came to adjusted operating cash flow. This is essentially operating cash flow after stripping out changes in working capital. The drop from $1.94 billion in 2021 to $1.50 billion in 2022 is awfully painful. But there was a slight increase to $1.51 billion last year. Unfortunately, EBITDA is the one metric that has been on a consistent decline, falling from $2.36 billion in 2021 to only $1.73 billion last year.
Even though results have been mixed for a couple of years now, management does have positive expectations for 2024 in its entirety. Revenue is expected to be between $13 billion and $13.13 billion. At the midpoint, this implies a 0.6% increase compared to what the company saw last year. This should be driven by a comparable store sales increase of between 1% and 2%. Earnings per share, meanwhile, should be between $12.85 and $13.25. The midpoint there implies net profits of about $1.08 billion. If we assume that other profitability metrics scale at the same rate that this is expected to, we would expect adjusted operating cash flow this year of $1.57 billion. Meanwhile, EBITDA would come in at around $1.79 billion.
Author - SEC EDGAR Data
Using these figures, I was able to value the company as shown in the chart above. This has the forward data for 2024, as well as the historical results for 2023. Relative to earnings, I would say that shares look about fairly valued. When it comes to the cash flow metrics, particularly the EV to EBITDA multiple, I still tilt in the direction of shares being slightly undervalued. It is worth noting that the EV to EBITDA multiple was aided by the fact that the company has a net cash position of nearly $318 million. Seeing as how this debt has maturities of between 2032 and 2052, the firm has plenty of opportunity to leverage the cash on hand as it so desires. So with total cash of $1.80 billion, the company has plenty of fuel to use on whatever it wants.
| Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
| DICK'S Sporting Goods | 14.4 | 9.9 | 8.5 |
| Academy Sports and Outdoors (ASO) | 7.9 | 7.7 | 4.9 |
| Big 5 Sporting Goods (BGFV) | 39.6 | 4.9 | 8.5 |
| Hibbett (HIBB) | 10.6 | 9.2 | 5.6 |
| Vista Outdoor (VSTO) | 3.9 | 5.0 | 18.0 |
| Johnson Outdoors (JOUT) | 75.6 | 45.0 | 11.1 |
As part of my analysis, I also compared DICK'S Sporting Goods to five similar firms, as shown in the table above. On a price to earnings basis, I found that three of the five companies ended up being cheaper than it. This number grows to four of the five on a price to operating cash flow basis. And when using the EV to EBITDA approach, two of the five were cheaper than our candidate, while another was tied with it. When you look at all of these combined, it makes the stock look slightly on the pricey end of the spectrum.
Author - SEC EDGAR Data
Of course, the picture can change. And in all likelihood, any such change is likely to occur when management announces financial results for one of the quarters. The very next opportunity for this to occur will be on May 29, before the market opens. At that time, management is expected to announce results for the first quarter of the 2024 fiscal year. Leading up to that point, analysts are forecasting revenue of $2.94 billion. This would represent an increase of 3.4% compared to the $2.84 billion generated one year earlier. Earnings per share, meanwhile, are expected to come in at $2.97. That would translate to net profits of $246.5 million. Unfortunately, this would be down from the $3.40 per share, or $304.6 million, that management reported for the first quarter of 2023. In the table above, you can see other profitability metrics that were reported for the first quarter of last year. In all likelihood, if earnings do fall year over year, then some of these will probably drop as well.
Even though I have decided to downgrade the stock leading up to this earnings release, I do believe in the firm’s potential in the long run. After all, in addition to gradually growing over time, the company operates in a massive market. According to the data available, the total addressable market across footwear, apparel, and hardlines, or within the US sports retail space, is worth an estimated $140 billion. This means that DICK'S Sporting Goods has a roughly 8.5% share of the overall market. This is actually up from the 8% that it had control of in 2022. So, between acquisitions and organic growth, the company is doing quite well.
In order to capture more of this market, the company is making deliberate and well calculated decisions. For instance, what management calls its ‘next generation’ stores could be a big hit. These stores will cost around $4.5 million to set up on a per location basis. From each of these locations, the company will generate around $14 million worth of revenue and $3 million of EBITDA. This implies a cash-on-cash return of around 65%, with a payback period of less than two years. Even though these stores are considerably smaller than the 120,000 square foot stores of the past, and even though they will generate less than the $35 million of revenue and $7 million of EBITDA, the total return is higher, while the payback period is lower. This can be seen in the image below.
DICK'S Sporting Goods
Management is making other investments as well. For the sake of brevity, I won't touch on everything. However, they are investing a great deal into their Golf Galaxy locations. At the end of last year, the company had 104 of these, including fourteen performance centers. They hope to grow the number of performance centers to between 40 and 50 by 2027. In addition to this, they continue to invest in other verticals, such as the ‘outdoor’ category. This is a large, fragmented industry worth an estimated $40 billion. An example of this commitment is the Moosejaw acquisition of last year. This could add fuel to the company’s fire in the long run. And when you add on top of this other opportunities such as its commitment to selling clearance products through its Going, Going, Gone! And Warehouse Sale locations, and its strategy of continuing to partner with major players in the athletics space, the future for the company seems bright.
Takeaway
Fundamentally speaking, DICK'S Sporting Goods seems to be a pretty solid company. Some financial performance as of late has been mixed. That is not ideal. But in the long run, the company does seem to be on good footing. Even considering this, however, I would make the case that the upside from here is probably more limited. This is based on pricing, both on an absolute basis and relative to similar firms. Of course, if new data comes out that shows that the company is accelerating its growth, my mindset could change. But for now, I think that a downgrade to a ‘hold’ is appropriate.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
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