Dick's Sporting Goods (NYSE:DKS) gave investors an early gift this year, as third-quarter results released Tuesday have driven the stock up 18%. With success online, renewed strength in its brick-and-mortar network, and clear proof that gun sales weren't necessary for success, Dick's might be turning itself into a compelling comeback play.
Third-quarter results show growth
Dick's latest earnings report indicated:
- Net revenue was up 5.6% year over year to $1.96 billion.
- Consolidated same-store sales grew 6% compared to 2018.
- Gross margins improved to 29.6% versus 28.2% a year ago.
- Non-GAAP (adjusted) consolidated net income was $44.8 million. That breaks down to $0.52 per diluted share. Analysts had anticipated adjusted earnings of $0.38. These results excluded the gains from subsidiary sales, as well as charges from the exit of eight Field & Stream stores. The company also had a noncash impairment that was excluded from non-GAAP results.
- On a GAAP basis, Dick's Sporting Goods reported net income of $57.6 million, or $0.68 per diluted share.
CEO Edward W. Stack noted the company experienced growth in average shopping ticket (transaction amount), as well as the overall number of transactions. He also said that the company's growth was divided among "each of our three primary categories of hardlines, apparel, and footwear."
Updated guidance raised
The strong results led the retailer to revise its full-year guidance.
- It now anticipates earnings of $3.63 to $3.73 per diluted share compared with $3.24 per share for the fiscal year ended Feb. 2, 2019.
- It should be noted that this share guidance excludes the anticipated impact from tariffs currently in place, as well as potential future ones.
- Non-GAAP earnings per share are expected to be $3.50 to $3.60.
- The company noted that it is still reviewing its hunting businesses, which include Field & Stream stores. As a whole, some had worried about the effects the retailer's new stance on gun sales might have on the bottom line. It's clear that the company has been able to find momentum even with fewer gun sales.
- Comps are forecast to increase by 2.5% to 3%. If accurate, this will mark a significant turnaround from the 3.1% decrease experienced last year.
Some areas for caution
A trend of Dick's Sporting Goods that is concerning is weakening operating income. Operating margins declined to 2.33% of sales in the third quarter versus 2.85% a year ago. Through the first nine months of the fiscal year, operating margins are down to 4.5% compared with 5.09% through the same time frame last year.
Because of this, the actual strength in terms of net income growth has stemmed from asset sales and other items -- $33.78 million in gains from sales of subsidiaries were the primary factor in driving pre-tax income throughout the first 39 weeks of the year.
Another move that Dick's has used to bolster its earnings are stock buybacks. The total average diluted share count through the first nine months of the year was 9.7% lower than in 2018. I'm not a particular fan of the trend, as it uses money that could be going into other areas of the actual business.
The stock as a relatively low P/E
The big winners today were investors who have held steady through the company's tough patches. With the new guidance, Dick's Sporting Goods shares are trading at roughly 12.9 times earnings. If the company can hold on to this momentum, it's a pretty cheap play. Based on the positive sentiment that seems to be developing for the holiday quarter, I like what's happening in terms of a turnaround. I'll be looking to see if those e-commerce sales continue growing.