Image Shown: Shares of Dick’s Sporting Goods Inc have been on a nice upward climb of late. The sporting goods retailer raised its full-year guidance for fiscal 2022 during its fiscal second quarter earnings report.
By Callum Turcan
On August 23, Dick’s Sporting Goods Inc (DKS) reported second quarter earnings for fiscal 2022 (period ended July 30, 2022) that beat both consensus top- and bottom-line estimates. The sporting goods retailer also raised its full-year guidance for fiscal 2022 in conjunction with the report, after previously lowering its guidance during its fiscal first quarter earnings update in May 2022.
We continue to like Dick’s Sporting Goods as an idea in the Dividend Growth Newsletter portfolio. Shares of DKS yield ~1.8% as of this writing when looking at its regular quarterly payout. The company has also paid out special dividends in the recent past, including a $5.50 per share special dividend in fiscal 2021 along with a $2.00 per share special dividend back in fiscal 2012.
Earnings Update
In the second quarter of fiscal 2022, Dick’s Sporting Goods reported that its comparable store sales dropped by 5.1% (after growing by 20.2% in the same period the previous fiscal year). Please note that Dick’s Sporting Goods’ performance is “normalizing” after the banner performance put up in fiscal 2020 (comparable store sales were up 9.9%) and fiscal 2021 (comparable store sales were up 26.5%). Management noted that “transactions declined 8.4% while the average ticket increased 3.3%” last fiscal quarter during the company’s latest earnings call and that “each of our 3 primary categories of hardlines, apparel and footwear performed generally in line with our expectations.”
The decline in the firm’s comparable store sales dragged its GAAP net sales down by 5% year-over-year last fiscal quarter to reach $3.1 billion. However, Dick’s Sporting Goods noted that its net sales were still up 38% versus its performance in the second quarter of fiscal 2019 when it generated $2.3 billion in GAAP net sales. Comparing its recent performance to its performance in fiscal 2019 is meaningful as that is the fiscal year before COVID hit the US economy, which prompted a major shift in consumer spending habits.
Last fiscal quarter, the company’s GAAP gross margin dropped by ~390 basis points year-over-year, hitting just over 36.0%. In the second quarter of fiscal 2019, its GAAP gross margin stood near 29.0%. The reason that, when looking at its performance over a longer time horizon, Dick’s Sporting Goods’ gross margins have been trending in the right direction is in part due a growing portion of its digital sales being fulfilled via its physical stores. Management noted that “our stores enabled over 90% of our total sales, serving both our in-store athletes and providing over 800 forward points of distribution for omnichannel fulfillment” in the fiscal second quarter during the retailer’s latest earnings call.
Dick’s Sporting Goods’ GAAP operating margin stood at 14.8% in the fiscal second quarter, down ~545 basis points year-over-year, due to headwinds facing its gross margins along with rising operating expenses. However, its GAAP operating margin last fiscal quarter was more than double what it was in the second quarter of fiscal 2019 (it stood just below 6.9% during that period). The decline in its operating margin saw Dick’s Sporting Goods’ GAAP operating income drop by 31% year-over-year to hit $0.5 billion last fiscal quarter.
Again, after a banner performance in fiscal 2020-2021, a normalization in its performance is to be expected. The company’s GAAP diluted EPS stood at $3.25 (down 28% year-over-year) and its non-GAAP diluted EPS stood at $3.68 (also down 28% year-over-year) in the second quarter of fiscal 2022.
The retailer’s net operating cash flows were held down by a large working capital build during the first half of fiscal 2022 (resulting in negative free cash flow during this period), though historically, Dick’s Sporting Goods has been a stellar free cash flow generator. Its free cash flows averaged ~$0.9 billion from fiscal 2019-2021. Dick’s Sporting Goods spent $0.1 billion covering its dividend obligations and another $0.4 billion buying back its stock during the first half of fiscal 2022.
As of July 30, 2022, the firm had $1.9 billion in cash and cash equivalents on hand with no short-term debt and $1.9 billion in long-term debt on the books, good for a marginal net cash position. We are huge fans of Dick’s Sporting Goods’ financial strength. The retailer also had sizable operating lease liabilities on the books at the end of this period to be aware of. The company exited July 30 with ample inventory on hand to meet consumer needs. Management noted in Dick’s Sporting Goods’ latest earnings press release that “our inventory is healthy and well-positioned, and we are excited about our assortment for the back-to-school season” which in part underpins the firm’s recent guidance boost.
Image Shown: We are big fans of Dick’s Sporting Goods’ relatively healthy balance sheet, as the firm had a marginal net cash position on hand as of July 30, 2022. Image Source: Dick’s Sporting Goods – Second Quarter of Fiscal 2022 Earnings Press Release
Guidance Update
During its fiscal first quarter earnings update in May 2022, Dick’s Sporting Goods reduced its forecasted comparable store sales performance (versus expectations laid out in March 2022) by increasing its expected decline on this front while also reducing its forecasted GAAP and non-GAAP diluted EPS for fiscal 2022. However, Dick’s Sporting Goods increased its GAAP diluted EPS forecast to $8.85-$10.55 (versus $7.95-$10.15 previously) and non-GAAP diluted EPS forecast to $10.00-$12.00 (versus $9.15-$11.70 previously) for fiscal 2022 during its latest earnings update as it updated its forecasted comparable store sales performance to a decline of 2% to 6% versus a decline of 2% to 8% previously.
Image Shown: An overview of Dick’s Sporting Goods’ operational and financial performance last fiscal quarter. Image Source: Dick’s Sporting Goods – IR Infographic covering the Second Quarter of Fiscal 2022
The company maintained its capital expenditure guidance of $400-$425 million in fiscal 2022, a forecast that Dick’s Sporting Goods issued out in March 2022. In our view, Dick’s Sporting Goods’ efforts to rollout new store formats and store concepts along with its digital and customer loyalty initiatives is helping mitigate the worst of the near term headwinds facing the retailer and the US consumer, with an eye towards inflationary pressures (rising fuel prices pressuring consumer spending power) and supply chain hurdles (difficulties managing inventory levels).
Growth Initiatives
Some of Dick’s Sporting Goods’ efforts include rolling out new store concepts such as its DICK’s House of Sport and Public Lands stores. The former includes turf fields, rock climbing walls, batting cages, putting greens, golf hitting bays, and places to do yoga along with providing an expansive slate of sport equipment and related services for consumers to purchase. The latter is focused on selling outdoors equipment and related products (from bikes to athleisure wear), and also includes a rock wall component along with the ability to sell related services and offer specialized shopping centers for biking, hiking, fishing, camping, and other outdoor activities.
Other store concepts include its Golf Galaxy Performance Center and we would like to stress here that all of these new concepts are relatively new and these rollouts are in their nascent stages, meaning if things go well, there is ample room for upside here. Here is what management had to say on the performance of some of the company’s new store concepts, digital efforts, and customer loyalty programs during Dick’s Sporting Goods’ second quarter of fiscal 2022 earnings call (emphasis added):
“As we continue our transformational journey, we are focused on enhancing our existing strategies to further strengthen our core business and to drive long-term profitable growth. At the heart of these strategies is our athlete experience, and we continue to develop a highly engaging in-store service model to better serve our athletes. Our teammates are highly trained and are focused on creating confidence for our athletes by finding the best product for them.
Our stores also now have highly experiential elements such as our premium full-service Footwear Decks, Elevated Soccer Shops, Golf Simulators, HitTrax Technology and Batting Cages. Our new DICK’S House of Sport and Golf Galaxy Performance Center stores are tremendous examples of the power of elevated service model and experiential retail. These new concepts are redefining sports retail and providing us with valuable learnings while also driving strong sales and profitability.
In addition, our digital experiences remain an integral part of our success, and we continue to prioritize investments in technology and in data science to elevate the athlete experience. We’re focused on advancing our personalization capabilities and enhancing our one-to-one relationships with our athletes through our digital marketing, ensuring we serve them the most relevant products at the right time.
Our personalization strategies are fueled by our robust and growing ScoreCard loyalty program and total athlete database. We now have over 25 million active ScoreCard loyalty members, a valuable cohort that has grown in recent years. And during the second quarter, our ScoreCard members generated well over 70% of our total sales, up approximately 200 basis points from the same period last year.” — Lauren Hobart, President and CEO of Dick’s Sporting Goods
We appreciate the company’s focus on innovation and its efforts are steadily paying off. On a final note, Dick’s Sporting Goods’ unit store count has grown from 727 as of August 3, 2019, to over 850 stores (across all of its store concepts) according to its latest earnings press release published August 23, 2022. The retailer’s store unit count will likely continue to grow at a robust pace going forward and we see ample room for upside on this front.
Concluding Thoughts
Dick’s Sporting Goods remains a rock-solid income growth idea that historically has been very friendly to shareholders. The retailer distributes cash to investors via boosts to its regular quarterly dividend (on an annualized basis its per share dividend more than doubled from fiscal 2018 to fiscal 2022), special dividends, and share repurchases while making sure it can still make meaningful investments in the business.
Serious near term headwinds remain such as inflationary pressures, supply chain hurdles, and labor shortages. With those headwinds in mind, over the long haul Dick’s Sporting Goods’ outlook remains quite bright due to plans to grow its store count, rollout new store concepts, and revamp its existing store base while further improving its digital presence and omnichannel selling capabilities. We continue to like the firm as an idea in our Dividend Growth Newsletter portfolio.
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Callum Turcan owns shares of DIS, META, GOOG, VRTX, and XLE and is long call options on VRTX. Chipotle Mexican Grill Inc (CMG), Dollar General Corporation (DG), Domino’s Pizza Inc (DPZ) and The Walt Disney Company (DIS) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Dick’s Sporting Goods Inc (DKS) and Home Depot Inc (HD) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.