DICK'S Sporting Beats Q2 Earnings as Initiatives Pay Off

After starting fiscal 2014 on a soft note, DICK'S Sporting Goods Inc. DKS is returning on the growth trajectory with successful implementation of its restructuring initiatives, as evident from the second-quarter financial results reported yesterday.

The company's adjusted earnings of 67 cents per share for the second quarter of fiscal 2014 met the upper-end of its guidance range of 62 to 67 cents and at the same time surpassed the Zacks Consensus Estimate of 65 cents. Earlier in the first quarter, the company's adjusted earnings of 50 cents per share not only missed its own guidance range of 51–52 cents but also came below the Zacks Consensus Estimate of 53 cents.

 

However, due to lower merchandise margin along with higher shipping and operating expenses, quarterly adjusted earnings witnessed a year-over-year decline of 5.6%. DICK'S Sporting's adjusted earnings for the quarter do not include charges related to restructuring of its golf business.  Including the same, the company's earnings on a reported basis came in at 57 cents per share compared with 67 cents in the year-ago quarter, which included certain impairment charges.

Quarter in Detail

Despite persistent weakness in the golf and hunting businesses, the company's total sales grew 10.3% to $1,688.9 million in the quarter, primarily driven by store openings, increased e-Commerce business and improved consolidated comparable-store sales (comps) performance. Moreover, total revenue came ahead of the Zacks Consensus Estimate of $1,653 million.

DICK'S Sporting's e-Commerce business constituted 3.6% of the total sales in the reported quarter compared with 5.6% in the year-ago quarter.

The company's consolidated comps increased 3.2% compared with a decline of 0.4% in the prior-year period. Moreover, consolidated comps were above the company's own guidance range of 1%–3%.

Comps at DICK'S Sporting Goods stores increased 4.1% while comps at Golf Galaxy stores declined 9.3%. The year-over-year rise in comps at DICK'S Sporting Goods stores was primarily attributable to a 2.3% increase in traffic and a rise of 1.8% in sales per transaction.

Adjusted gross profit in the reported quarter came in at $505 million, up 5.3% year over year. However, gross margin contracted 140 basis points (bps) to 29.9% primarily due to a 112 bps reduction in merchandise margin and higher shipping costs owing to rise in e-commerce sales. These negatives were partially offset by occupancy leverage.

Adjusted operating income for the quarter declined 9% year over year to $131.9 million versus $145 million in the second quarter of fiscal 2013. Moreover, adjusted operating margin contracted 170 bps to 7.8%. The year-over-year fall in operating margin was primarily due to lower gross margin and increased advertising expenses to support promotional activity and higher store pre-opening expenses partially offset by lower administrative expenses, all as a percentage of sales.

Financial Aspects

DICK'S Sporting ended the quarter with cash and cash equivalents of $100.1 million and shareholders' equity of $1,696.9 million. Moreover, the company did not have any outstanding borrowings under its $500 million credit facility.

During the first half of the fiscal, DICK'S Sporting generated cash flow of $152.2 million from its operational activities, and had net capital expenditure of $150.4 million. Total inventory at the quarter-end grew 11.2% on a year over year basis.

Dividend & Share Repurchases

DICK'S Sporting has always created value for its shareholders by returning capital in the form of dividends and share repurchases. To boost shareholder wealth, the company on Aug 14 declared a quarterly dividend of 12.5 cents per share, which will be paid on Sep 26, 2014 to shareholders of record on Sep 5, 2014.

During the reported quarter, DICK'S Sporting repurchased about 2.2 million shares for a total sum of $100 million. Since the announcement of its $1.0 billion share repurchase program in Mar 2013, the company has bought almost $380.6 million worth of its common stock.

Store Update

In the reported quarter, DICK'S Sporting opened 8 namesake stores and 1 Field & Stream store while it relocated 3 namesake stores. This brought the total count of DICK'S Sporting Goods stores to 574 across 46 states and Golf Galaxy stores to 79 in 29 states as of Aug 2.

Guidance

Looking at the second-quarter operating results, the company is now cautiously optimistic about the remaining half of fiscal 2014. Therefore, DICK'S Sporting has reiterated its outlook for fiscal 2014 and initiated an impressive guidance for the third quarter.

However, the company expects its operating results for the second half of fiscal 2014 to be negatively impacted by cautious consumer spending and higher promotional activities which may drag down its full fiscal earnings by 4 cents per share.

For fiscal 2014, management reiterated its earnings per share guidance range of $2.70 to $2.85. Currently, the Zacks Consensus Estimate stands at $2.76 per share. Comps are still projected to grow in the range of 1%–3%. Further, the company now intends to open about 46 namesake stores, 8 Field & Stream stores and 1 Golf Galaxy store and also expects to relocate 5 namesake stores and 2 Golf Galaxy stores. Furthermore, it wants to remodel five DICK'S Sporting Goods stores.

For fiscal 2014, the company anticipates capital expenditure of $340 million on a gross basis and $245 million on a net basis.

Apart from updating fiscal 2014 guidance, DICK'S Sporting initiated its third-quarter fiscal 2014 outlook. DICK'S Sporting anticipates its earnings per share to come in the range of 38–42 cents. Currently, the Zacks Consensus Estimate stands at 41 cents per share. Comps for the third quarter are expected to increase in the range of 1%–3%. Further, during the quarter, DICK'S Sporting intends to open 24 namesake stores, 7 Field & Stream stores and 1 Golf Galaxy store. Apart from this, it anticipates relocation of one each DICK'S Sporting Goods and Golf Galaxy stores while it might remodel a namesake store in the quarter.

Other Stocks Worth Considering

Currently, DICK's Sporting carries a Zacks Rank #5 (Strong Sell). Better-ranked players in the retail space include Citi Trends, Inc. CTRN, The Men's Wearhouse, Inc. MW and Barnes & Nobel, Inc. BKS. Of these, Citi Trends and Men's Wearhouse sport a Zacks Rank #1 (Strong Buy) while Barnes & Nobel holds a Zacks Rank #2 (Buy).

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