Dick’s Sporting Goods put up impressive third-quarter results that showed strong sales performance across both e-commerce and brick-and-mortar. E-commerce/digital/online sales continue to soar across the broader retail arena. Dick’s Sporting Goods’ gross and merchandising margins were healthy during its third quarter, and its inventory is clean as the sporting goods retailer heads into the all-important holiday season. We’re big fans of Dick’s Sporting Goods’ tremendous free cash flow generation and its balance sheet health. For dividend growth investors, Dick’s Sporting Goods offers a compelling combination of a 2%+ dividend yield and an impressive 3.2 Dividend Cushion ratio at the time of this writing.

By Brian Nelson, CFA

On November 24, Dick’s Sporting Goods (DKS) reported fantastic third-quarter results that showed net sales increase nearly 23% on a year-over-year basis and non-GAAP consolidated net income soar to $182.2 million ($2.01 per diluted share) from $44.8 million ($0.52 per diluted share) during the third quarter of 2019. Dick’s Sporting Goods is currently trading below our fair value estimate, offers a dividend yield north of 2%, and a Dividend Cushion ratio of 3.2 thanks to its tremendous free cash flow generation.

The quarterly highlights were many. Sales through its e-commerce channel leapt 95% during the third quarter. Same store sales advanced 23.2% in the quarter (significantly higher than the 6% mark it registered in the same period a year ago), while brick-and-mortar comparable store sales also grew at an impressive double-digit clip. The company saw increases in both average ticket and number of transactions.

Total inventory fell 9.8% at the end of the third quarter versus last year as demand was strong across outdoor activities (golf) as well as home fitness. Management noted on its conference call that its inventory is “very clean” (there’s not much stale product to be overly discounted), so we’re expecting new fresh product to propel sales through the holiday season and at higher better margins. Gross and merchandise margins improved substantially in the third quarter, up 530 basis points and 277 basis points, respectively.

Dick Sporting Goods’ e-commerce penetration of its net total sales was 21% in the third quarter versus 13% at the end of last year’s period, and while people ordering from home due to COVID-19 bolstered this performance to a meaningful degree, we expect this trend to continue even during “normal” conditions. We’ve also witnessed e-commerce/digital/online sales soar across the broader retail landscape, from the big box retailers Walmart (WMT), Target (TGT) and Best Buy (BBY) to specialty apparel retailers such as Williams Sonoma (WSM) to even some of the weaker teen retailers such as Abercrombie & Fitch (ANF) and Gap (GPS) and beyond.

Dick’s Sporting Goods’ quarterly performance and ongoing fundamental momentum underscore the effectiveness of its omni-channel platform that serves the athlete in how they want to shop (in-store, curbside or online). It also showcases the attractiveness of its brand-name offerings (adidas, Callaway Golf, Columbia, Nike, The North Face, Under Armour, Nike, Yeti, etc.) as well as private (vertical) line-up (Alpine Design, CALIA, DSG, Field & Stream, Second Skin, Top-Flite, etc.). As for the company’s outlook, here’s how things are trending so far in the current fourth/holiday quarter, as noted on Dick’s Sporting Goods’ conference call:

Overall, the favorable trends in our business have continued into Q4. These strong results have been partially offset by warmer weather that has negatively impacted sales in the important cold weather categories. Taken together through this past weekend, our comp sales have increased in the high teens. As I look at our business, we have a lot to be excited about. One of the strategies I'm most enthusiastic about is our private brand strategy, which we now referred to as our vertical brands.

Collectively, our vertical (private brand) golf equipment and apparel brands represent our number one brand in golf while fitness geared as our single largest fitness brand. Looking ahead, we will invest in making our vertical brands even stronger. This includes improved space in store, increased marketing and expanding into additional product categories. At the same time, we will also continue to invest in our strategic partnerships with key national brands such as Nike, Calloway and The North Face. We've recognized that these important brands are real differentiating factors that create authenticity and credibility with our assets…

…Looking to the fourth quarter, we're very enthusiastic about our business and we look forward to serving athletes this holiday season.

Dick’s Sporting Goods’ balance sheet and cash-flow generation are healthy, too. The company ended the third quarter of 2020 with $1.06 billion in cash and cash equivalents and $411 million in convertible notes (due 2025), though we note it does have $2.3 billion in long-term operating lease liabilities. Free cash flow generation of $761.1 million during the first nine months of 2020 covered dividends paid of $80.9 million over the same period many times over. Its strong balance sheet and impressive free cash flow coverage of the dividend are key components of its Dividend Cushion ratio.

Concluding Thoughts

Dick’s Sporting Goods put up impressive third-quarter results that showed strong sales performance across both e-commerce and brick-and-mortar. E-commerce/digital/online sales continue to soar across the broader retail arena. Dick’s Sporting Goods’ gross and merchandising margins were healthy during its third quarter, and its inventory is clean as the sporting goods retailer heads into the all-important holiday season. We’re big fans of Dick’s Sporting Goods’ tremendous free cash flow generation and its balance sheet health. For dividend growth investors, Dick’s Sporting Goods offers a compelling combination of a 2%+ dividend yield and an impressive 3.2 Dividend Cushion ratio at the time of this writing.

Dick’s Sporting Goods’ 16-page stock report >>

Dick’s Sporting Goods Dividend report >>

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Brian Nelson owns shares in SPY, SCHG, DIA, VOT, and QQQ. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.