Johnson Outdoors is benefiting greatly from fishing-related sales, and such a tailwind may be helping other sporting goods retailers in the group. New store openings continue to drive Dick’s Sporting Goods’ top-line higher, but the company’s materially increased profit guidance for fiscal 2018 stole the show in its fiscal first quarter report.
By Kris Rosemann
The sporting goods industry seems to have found the path to resiliency, despite continued political debate around gun control in the wake of school and event shootings, and some vendors such as Dick’s Sporting Goods (DKS) even going as far as destroying the assault weapons once for sale on their shelves. We’ll talk more about Dick’s Sporting Goods’ strength in this note, which has positive implications at Hibbett (HIBB) and Big Five Sporting Goods (BGFV), but the company’s resilience might also be a good sign for some of the athletic-oriented sporting apparel providers, particularly Under Armour (UA, UAA), which by our channel checks has prominent placement in many Dick’s Sporting Goods’ stores.
Dick’s Sporting Goods released its fiscal 2018 first-quarter results in late May, and the market absolutely loved them. During the quarter, net sales advanced 4.6% from the year-ago period thanks to new store openings, but same store sales still fell 2.5% when adjusted for the calendar shift due to the 53rd week in 2017. A continued deceleration in hunt and electronics sales and colder spring weather were key factors in the same-store sales weakness, but digital sales leapt by 24% and accounted for 11% of revenue in the quarter compared to 9% in the first quarter of fiscal 2017.
We think Dick’s Sporting Goods benefited from strong fishing-related demand. Earlier in May, Johnson Outdoors (JOUT) reported a double-digit increase in its sales and earnings during its second quarter of fiscal 2018 (ends March), and the company pointed to fishing as its biggest and most profitable business (its fishing revenue was up 19% in the period). Johnson Outdoors benefits from the well-recognized Minn Kota and Humminbird brands with respect to fishing sales, but Dick’s Sporting Goods also generates a meaningful percentage of business from this end market.
During the quarterly release, Dick’s Sporting Goods reported that its net income per diluted share advanced to $0.59 in the quarter from $0.52 in the comparable period of fiscal 2017 thanks in part to a lower tax bill. Management was quick to point to execution against its merchandising strategy as a driver of higher merchandise margins. Fewer promotions and cleaner inventory were the result of product newness, private brand strength, and a more refined assortment, and the company expects these factors to persist as it continues to optimize its assortments.
Though things are looking better for Dicks Sporting Goods, its debt load has climbed in recent quarters, and net debt sat at just over $239 million at the end of the first quarter of fiscal 2018 compared to net cash of ~$11 million at the end of fiscal 2017 and net cash of ~$36 million a year earlier. Free cash flow on an annual basis (averaging ~$300 million in fiscal 2015-2017) has been more than sufficient in covering annual cash dividends paid ($73 million in fiscal 2017) in recent years. Shares yield nearly 2.5% as of this writing, and its Dividend Cushion ratio comes in at 2.5.
Dick’s Sporting Goods’ management took the opportunity to raise its bottom-line guidance following its solid fiscal first quarter and now expects earnings per diluted share to be in a range of $2.92-$3.12 in fiscal 2018 compared to previous guidance of $2.80-$3.00 and fiscal 2017 results of $3.01. Same store sales growth is expected to be flat to a low single-digit decline from fiscal 2017 levels on a 52-week to 52-week comparative basis, but new store opening should help buoy the overall top line. Free cash flow should receive a boost from capital spending guidance of $280 million compared to $474 million in fiscal 2017.
We’ve raised our fair value estimate for Dick’s Sporting Goods to $39 per share after rolling our valuation model forward to account for cash earned, factoring in management’s new guidance, and assuming better margin performance thanks to recent improvements in promotional activity. We’re generally not looking to add exposure to the big box retailer, or a sporting goods provider, in general, as the broader retail environment remains competitive despite recent strength in consumer spending as evidenced by the company’s same store sales guidance for fiscal 2018. It doesn’t mean that we don’t like Dick’s Sporting Goods or others in the group. It just means we don’t like them more than Apple (AAPL), Facebook (FB) or Visa (V), as examples.
Retail – Sporting Goods: BGFV, DKS, ESCA, HIBB, VSTO
Sporting Goods: CLAR, ELY, JOUT, NLS, POOL
Related: RGR, AOBC, SPWH, BC, HZO
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.