Despite Weak Earnings, the Sky Is Not Falling on Dick's

Although Dick's first-quarter earnings results were anything but impressive, the company's overall growth story remains strong; investors should consider the stock on weakness.

May 23, 2014 at 9:38AM

Shares of Dick's Sporting Goods (NYSE:DKS) plunged more than 15% in pre-market trading on Tuesday, as recent first-quarter earnings results from the sports and fitness retailer failed to impress investors. Weakness in two main product categories overshadowed a few really good things in the company's report. For instance, there was strength in apparel and footwear, driven in part by incredible brand growth from athletic apparel, footwear, and accessories manufacturer Under Armour (NYSE:UA).


Source: Dick's Sporting Goods

Earnings weakness
In the first quarter, Dick's missed the consensus estimates on both the top and bottom lines. The company's reported revenue of $1.4 billion and missed the average estimate of $1.46 billion; its reported earnings per diluted share of $0.50 missed the average estimate of $0.53.

On a year-over-year basis, the company grew Q1 revenue 7.9%. However, same- store sales growth increased only 1.5%, which was much lower than management's previously stated guidance range of 3%-4%. Additionally, earnings per diluted share grew only 4.2% in the quarter.

Even worse was the company's revised guidance. For the second quarter, the company expects diluted earnings per share to be in a range of $0.62-$0.67, which is significantly lower than the average estimate of $0.82. For the full year, management now expects diluted EPS to be in a range of $2.70-$2.85, which represents a large downward revision to its prior guidance of $3.03-$3.08.

What happened?
Management blamed the weak results on worse-than-expected performances from the company's hunting and golf categories. Chairman and CEO Edward Stack explained:

Our difficulties this quarter were isolated to two categories: golf and hunting. After a very challenging first quarter in golf last year, we expected some further headwinds and only modest improvement, but instead we saw a continued significant decline. In the case of hunting, we planned the business down based on last year's catalysts, but it was even weaker than expected.

Some bright spots
All was not bad for Dick's in the first quarter, however. In fact, many things went well, including growth in athletic apparel, footwear, and team sports categories, e-commerce, and new store openings.

The strength in apparel, footwear, and team sports is in-keeping with Under Armour's recently reported results. The Baltimore-based company, which derived 71% of its recent first-quarter net revenue from its signature apparel segment alone, grew its total apparel segment 33% to $459 million in the quarter and was no doubt a source of strength for Dick's retail-apparel category.

Likewise, Under Armour's footwear segment, which still only represents approximately 18% of the company's net revenue, contributed to Dick's strength in the footwear category in the first quarter. Under Armour grew its footwear category 41% to $114 million in Q1.

Just like Under Armour, Dick's is also strengthening its e-commerce division. The business represented 7% of the company's total sales in the quarter, which was up from 5.8% in the same quarter last year.

Additionally, Dick's opened eight new store locations in the quarter, which brings the company's total store count to 566 and gives it a presence in 46 states. Going forward, management expects to open 50 new stores in fiscal 2014, which means the pace of new store openings will ramp up significantly in the quarters ahead.


(Source: Official Under Armour Facebook)

Bottom line
Dick's management is expecting continued weakness in its golf segment, while weakness in the hunting segment is expected to stabilize throughout the year. This has dampened the overall growth story for the company, but shares have now paid the price. With continued new store openings and powerful growth from popular athletic brands like Under Armour, investors should still consider Dick's Sporting Goods for long-term growth.

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Philip Saglimbeni owns shares of Under Armour. The Motley Fool recommends Under Armour. The Motley Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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