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Dick's (NYSE:DKS) Beat and Raise Q3, Stock Soars


Full Report / November 21, 2023

Sporting goods retailer Dick’s Sporting Goods (NYSE:DKS) reported Q3 FY2023 results topping analysts' expectations, with revenue up 2.8% year on year to $3.04 billion. Turning to EPS, Dick's made a non-GAAP profit of $2.85 per share, improving from its profit of $2.60 per share in the same quarter last year.

Dick's (DKS) Q3 FY2023 Highlights:

  • Revenue: $3.04 billion vs analyst estimates of $2.95 billion (3.3% beat)
  • EPS (non-GAAP): $2.85 vs analyst estimates of $2.46 (15.8% beat)
  • Full year guidance raised for same-store sales and non-GAAP EPS
  • Free Cash Flow was -$89.75 million compared to -$172.7 million in the same quarter last year
  • Gross Margin (GAAP): 34.9%, up from 34.2% in the same quarter last year
  • Same-Store Sales were up 1.7% year on year (beat vs. expectations of down 0.8% year on year)
  • Store Locations: 869 at quarter end, increasing by 19 over the last 12 months

Started as a hunting supply store, Dick’s Sporting Goods (NYSE:DKS) is a retailer that sells merchandise for traditional sports as well as for fitness and outdoor activities.

The core customer is anyone in need of balls, bats, rackets, or other equipment for traditional sports such as basketball, baseball, or tennis. Dick’s also addresses the needs of fitness and outdoor enthusiasts due to their selection of exercise equipment such as weights and hunting, fishing, and camping equipment such as binoculars. The breadth of sports and activities covered and the depth of product in each category is what differentiates Dick’s. Sporting goods can be large and cumbersome, so general merchandise retailers who devote limited space will have limited selection.

A Dick's store ranges from around 30,000 to 70,000 square feet, with some larger flagship locations exceeding 100,000 square feet. At the entrance is usually a large, open space that features seasonal displays and promotions. The store is then typically divided into sections such as athletic/casual apparel, sneakers/footwear, then sections based on specific sports. The company also has a developed e-commerce presence, which Dick’s launched in 1997 as an early adopter of online shopping. Many customers choose to order online and pick up at their nearest store.

Athletic Apparel and Footwear Retailer

Apparel and footwear was once a category thought to be relatively safe from major e-commerce penetration because of the need to try on, touch, and feel products, but the category is now meaningfully transacted online. Everyone still needs clothes and shoes to go outside unless they want some curious (or horrified) looks. But this ongoing digitization is forcing apparel and footwear retailers–that once only had brick-and-mortar stores–to respond with omnichannel offerings. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stagnate, so the evolution of clothing and shoes sellers marches on.

Retailers offering sporting and outdoor goods include Academy Sports and Outdoor (NASDAQ:ASO), Sportsman’s Warehouse (NASDAQ:SPWH), and Hibbett (NASDAQ:HIBB).

Sales Growth

Dick's is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company's annualized revenue growth rate of 10.1% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was impressive despite not opening many new stores, implying that growth was driven by higher sales at existing, established stores.

Dick's Total Revenue

This quarter, Dick's reported decent year-on-year revenue growth of 2.8%, and its $3.04 billion in revenue topped Wall Street's estimates by 3.3%. Looking ahead, analysts expect sales to grow 3.4% over the next 12 months.

Number of Stores

When a retailer like Dick's keeps its store footprint steady, it usually means that demand is stable and it's focused on improving operational efficiency to increase profitability. Since last year, Dick's store count increased by 19 locations, or 2.2%, to 869 total retail locations in the most recently reported quarter.

Dick's Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.

Dick's demand within its existing stores has been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company's same-store sales have grown by 1.4% year on year. Given its flat store count over the same period, this performance stems from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online.

Dick's Year On Year Same Store Sales Growth

In the latest quarter, Dick's same-store sales rose 1.7% year on year. By the company's standards, this growth was a meaningful deceleration from the 6.5% year-on-year increase it posted 12 months ago. We'll be watching Dick's closely to see if it can reaccelerate growth.

Gross Margin & Pricing Power

We prefer higher gross margins because they make it easier to generate more operating profits.

Dick's unit economics are higher than the typical retailer, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it's averaged a decent 35.3% gross margin over the last eight quarters. This means the company makes $0.35 for every $1 in revenue before accounting for its operating expenses. Dick's Gross Margin (GAAP)

Dick's gross profit margin came in at 34.9% this quarter, flat with the same quarter last year. This steady margin stems from its efforts to keep prices low for consumers and signals that it has stable input costs (such as freight expenses to transport goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q3, Dick's generated an operating profit margin of 9%, down 2 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume the reduction was driven by weaker cost controls or operating leverage on fixed costs.

Dick's Operating Margin (GAAP)

Zooming out, Dick's has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer retail business, producing an average operating margin of 11.6%. However, Dick's margin has declined by 3.5 percentage points year on year(on average). Although this isn't the end of the world, some investors were likely hoping for better results.

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q3, Dick's reported EPS at $2.85, up from $2.60 in the same quarter a year ago. This print beat Wall Street's estimates by 15.8%.

Dick's EPS (Adjusted)

Between FY2019 and FY2023, Dick's adjusted diluted EPS grew 119%, translating into a remarkable 29.9% average annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 1.8% year-on-year increase in EPS.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

Dick's burned through $89.75 million of cash in Q3, representing a negative 2.9% free cash flow margin. The company reduced its cash burn by 48% year on year.

Dick's Free Cash Flow Margin

Over the last eight quarters, Dick's has shown solid cash profitability, giving it the flexibility to reinvest or return capital to investors. The company's free cash flow margin has averaged 5%, well above the broader consumer retail sector. Furthermore, its margin has averaged year-on-year increases of 6.3 percentage points. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.

Dick's has a solid track record of investing in profitable projects and is more likely to get better terms with financiers if it wants to raise or borrow capital. Its five-year average ROIC is 19.8%, higher than most retailers.

Key Takeaways from Dick's Q3 Results

With a market capitalization of $10.12 billion, a $1.41 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Dick's has the resources needed to pursue a high-growth business strategy.

We were impressed by how significantly Dick's blew past analysts' revenue expectations this quarter. We were also glad its full-year same-store sales and earnings guidance were both raised and ended up exceeding Wall Street's estimates. The only blemish was that its gross margin missed analysts' expectations. Overall, we think this was a very strong quarter that should satisfy most shareholders. The stock is up 8.7% after reporting and currently trades at $129.3 per share.

Is Now The Time?

Dick's may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

Dick's isn't a bad business, but it probably wouldn't be one of our picks. Although its strong free cash flow generation allows it to invest in growth initiatives while maintaining an ample cash cushion, the downside is that its mediocre same-store sales performance has been a headwind. On top of that, its low growth in new store openings show it's focused on existing locations.

Dick's price-to-earnings ratio based on the next 12 months is 9.8x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Dick's, it seems to be trading at a reasonable price.

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