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Dick’s Sporting Goods Whiffs But The Outlook Lifts The Market

Tuesday, June 2, 2020 | Thomas Hughes
Dick’s Sporting Goods Whiffs But The Outlook Lifts The MarketThe Worst Is Over For Dick’s

Dick’s Sporting Goods (DKS) reported first-quarter earnings this morning and delivered a mixed bag of results. While revenue came in above expectations EPS was a big miss due to the COVID-19 pandemic. Despite this news, the stock is up 2.0% in the pre-market action as investors rush to get in. The mitigating factors? Indications of system-wide strength before the pandemic, a strong cash positions, and signs the rebound will be quite strong indeed.

A Bad Report, But Take It In Context

The Dick’s Sporting Goods Q1 figures aren’t great but that was expected, the pandemic cut deeply into business. The fact that revenue beat consensus and EPS missed is notable but not all that relevant when you consider how fat the pandemic set in. When the analysts began downgrading their targets there was no way for them to know how badly revenue would be hit, how long the shut-downs would last, or what costs would be incurred to cut into the bottom line. The estimates were nothing more than guesses.

To take the results in context, an understanding of what business was like before the pandemic struck is important. According to Lauren Hobart, company president, consolidated same-store sales were up 7.9% from the prior year, that's pretty good. The reason? Dick’s has been working on a system-wide strategy to increase revenue and profitability. The strategy is focused on an Omni-channel approach including eCommerce and it is working.

Lauren R. Hobart, President - "Through March 10th our consolidated same-store sales increased 7.9%, a clear indication that our strategies were working.“

So, first-quarter revenue fell -30.7% to beat the consensus estimate by roughly 225 basis points. GAAP EPS came in at -$1.71 to miss consensus by $1.17. On an adjusted basis, EPS came in at -$0.62 to miss by a nickel. Comps fell only -29.5% and were offset by eCommerce channels including a new curbside pickup option.

All in all, eCommerce sales surged 110% from the previous year and are expected to remain strong in the post-pandemic environment. Speaking strictly from my own experience, once you set up to buy from an online retailer its all-too-easy to reuse that channel over and over again. Just look at the success Amazon (AMZN) has had with it. In terms of sales, eCommerce increased to 39% of total sales proving just how important it will be for ALL retailers as the economy moves forward.

It’s The Outlook, And The Dividend

The outlook for the 2nd quarter, the rest of the year, and next year is what has the stock moving today. Dick’s CEO and Chairman Edward Stack said the 2nd quarter is already off to a strong start and momentum is building. To start, revenue in the first four weeks of the quarter is down only -4% compared to the -30.7% posted in the first quarter. What makes this so noteworthy is that only 44% of the stores had been reopened at the time the data was compiled; since then, reopening has reached the 80% level. Looking forward, the company expects to recover all of its previous business by the end of this calendar year and return to meaningful growth in 2021.

"With confidence in our liquidity position and our stores re-opening, we can turn our attention to gaining market share for the remainder of 2020 and positioning our business for profitable growth in 2021,"

The dividend, despite the incredibly poor Q1 showing, is still safe and even attractive. At today’s prices, the yield is close to 3.4% so easy to like. The only negative I see is the payout ratio. The payout ratio, based on 2020 earnings, is running well over 200% and may get worse. The mitigating factor here is 1) the company’s enormous cash positions, $1.5 billion and 2) the outlook for next year. The projected payout ratio next year is closer to 40% and may move lower if the rebound proves to be as strong as it looks now.

The Technical Outlook: Bullish, But …

The technical outlook for Dick’s Sporting Goods is bullish but there is a caveat. The stock is trading just below a possibly strong resistance point and showing signs of resistance with today’s action. The stock opened strongly but profit-takers and weak hands have chosen to liquidate, the risk is that price action will continue to move lower in the near-term but, if it does, it will likely result in another buy signal in the not-too-distant future.

For the bull case, both MACD and stochastic are bullish and showing a little bit of strength. If price action can maintain current levels and consolidate another move higher is likely. A break above the $38.25 level would be the signal that price action is ready to move back up to the $44-$48 region.

Dick’s Sporting Goods Whiffs But The Outlook Lifts The Market

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