Did the Market Hand You a Post-Earnings Opportunity?

Dicks Sporting Goods (NYSE: DKS  ) fell 7% on Tuesday behind a horrible quarterly report and a conference call that has been the subject of negative discussions among analysts. The company not only missed top and bottom-line expectations, but used "weather" and a "sluggish" environment as an excuse for the performance – both common scapegoats. While this performance, combined with the earnings of Big 5 (NASDAQ: BGFV  ) , might paint a gloomy picture for the space, a closer look reveals one of these companies is presenting deep value.

Missing the target on every metric

Dicks is the sporting goods retail leader, having flourished with maximum efficiency and consistent growth for the last decade. While the company's total revenue rose 6.6% year over year in its most recent quarter, its same store sales rose just 1.2%, far short of its guidance for a 3.5% to 4.5% rise.

This decline in same store sales was the basis for its price weakness on Tuesday, as it indicates that fewer consumers are coming in existing stores. Also, it shows that higher-priced goods are likely not being purchased.

As a result, the company's SG&A expenses as a percentage of sales rose 37 basis points to 22%, which is important for retail companies that have high expenses. Thus, the company's operating income increased just 1.8%, far short of revenue growth, as its operating margin declined 42 basis points to 8.95%.

The performance doesn't "seem" right

Overall Dicks' earnings report was ugly. The company's revenue was short; its same store performance was horrendous; and its margins declined. Yet, for the most part, investors give Dicks the benefit of the doubt, as its 7% drop doesn't seem appropriate following a quarter that missed estimates by such a wide margin and led to a lower full-year sales outlook. In my mind, the drop should have been more significant.

For example, Dicks competitor Big 5 lost 20% of its value following its recent quarterly report. In Big 5's quarter, same store sales rose 4.4%, net income grew 135%, while revenue grew 6% year-over-year, reflecting an impressive margin improvement. Yet, despite these obvious strengths compared to Dicks, Big 5's quarter was viewed as worse by Wall Street, although revenue barely missed estimates and the company beat on the bottom line.

Does The Loss Reflect Fundamentals?

The disconnect in stock performance following these two companies is a bit mindboggling, but might be explained with a simple look at how both are valued. Theoretically, a stock that is more expensive relative to fundamentals has higher expectations. Thus, a slight miss for a more expensive stock can lead to larger losses. Therefore, let's take a look at a few key metrics.

 

Big 5 (earnings)

Dicks (earnings)

Market Cap

$400 million

$5.85 billion

P/E Ratio

15.59

19.63

Forward P/E Ratio

12.27

14.3

Price/Sales

0.41

0.99

PEG Ratio

0.86

1.11

Operating Margin

4.45%

8.93%

Price/Operating Cash Flow

9.2

15.4

With the exception of operating margins, Big 5 is fundamentally more attractive in every single category. In the case of operating margins, Big 5 has shown great growth over the last year. Meanwhile, Dick's margins have declined, suggesting that Dick's margin upside is limited, while Big 5 has room to expand its margins.

Then, as we look at P/E ratio, forward P/E ratio, and expected five year growth (PEG ratio), Dicks isn't even close in presenting the level of value that we see in Big 5. In regards to price/sales, Dicks is more than twice as expensive, and more than 50% as expensive in comparison to operating cash flow.

Is There Other Competition? 

Aside from Big 5 and Dicks, the other most notable competitor is Hibbett Sports (NASDAQ: HIBB  ) , but they have not yet announced earnings. However, even a quick glance at Hibbett further validates the bullish points for Big 5.

In particular, Hibbett has reported revenue of $825 million over the last 12 months; Big 5 has created $981 million in the same period. Thus, Big 5 is larger, yet Hibbett's market cap is more than threefold larger. 

The primary reason for this disconnect is margins, as Hibbett has an industry best 14% operating margin. Yet, Hibbett's margins declined during its last quarter (much like Dicks). As previously noted, Big 5 continues to explode with margin growth -- Dicks and Hibbett's margins are declining -- which, along with comparable sales growth, further supports its upside potential. 

Final thoughts

After assessing both Dicks and Big 5's last quarter, I find it clear that Big 5's was better, and its stock is cheaper, yet the company lost more post-earnings value.

As a value investor, this is what I call an opportunity, or an irrational example of performance in the market. Typically, when such an event occurs, gains are often created, as the market tends to value companies correctly over an extended period of time.

With that said, I would strongly consider additional due diligence in favor of Big 5 if seeking an investment in this space. Clearly, Big 5 is growing faster, improving more rapidly, and is valued cheaper, with a greater volume of new consumers shopping at their stores. Unfortunately, the same can't be said for Dicks.

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