Dick’s Sporting Goods Deflates In The Absence Of Stimulating Tailwinds
Dick’s Sporting Goods (NYSE:DKS) is a great example of a phenomenon we are observing in the market today. The company once supported and inflated by stimulus tailwinds and stay-at-home spending is deflating in the absence of the said stimulus. This deflation is not just on the top line but the bottom line as well, as the previous two-year’s revenue strength led to significant leverage. Now, the shares are down another 15% in premarket trading, roughly 60% from the high, and might be at the bottom of the move. The pre-market support level near $62.50 is coincident with the 2020/2021 consolidation and trend-following bounce that got the market into this situation in the first place. At this level, the stock is trading at only 6.8X its guidance and paying what looks like a safe 2.75% with a positive outlook for distribution growth.
Dick’s Has Mixed Quarter And The Guidance Is Awful
Dick’s had an OK quarter considering the conditions, definitely not bad enough to warrant the premarket stock implosion, but the guidance is a different story. The Q1 revenue came in at $2.7 billion which is 266 basis points better than expected but down 7.5% from last year. Last year was, of course, a record quarter for the company so a little giveback is to be expected and the comp to 2019 is +40%. On a comp-store basis, sales are down -8.4% versus last year and offset by a small amount of expansionary growth.
Moving on to the margins, the company experienced significant margin compression related to rising costs of goods, labor, and freight. The EBIT margin contracted by 381 bps, 406 adjusted, to drive a 28% decline in net income. That decline grows to 29% when adjusted. On the bottom line, both the GAAP and adjusted earnings were aided by share repurchases but still fell 27.6% and 24.8% on a YOY basis which is a little better than expected. The problem for the market is that revenue weakness is expected to increase and margins are expected to narrow as the year wears on.
The company’s new guidance is calling for FY 2022 comp sales to fall -8% to -2% versus last year. That gives a range of $11.30 to $12.09 compared to the $12.55 billion Marketbeat.com consensus figure and the EPS guidance is worse. The company lowered its guidance for adjusted earnings to $9.15 to $11.70 compared to the previous low-end of $11.70 and the consensus of $12.55.
Capital Allocations Shift At Dick’s Sporting Goods
Management made some changes to capital allocation that may impact the stock price. The major change was a decrease in share repurchases that, if continued, will reduce support for the stock. The net change was -40% compared to last year but that was offset by a 38% increase in dividend payments that put the yield near 3.0% with shares at their new low. Based on the metrics, the payout is incredibly safe even with the reduced guidance. The payout ratio is a mere 21% of the low end for adjusted EPS and the balance sheet is very healthy. The company’s debt level increased by 395% but leverage remains low, cash is up 21% to $2.3 billion, and inventory is up 40% as well.
Dick’s Sporting Goods fell as much as 20% in early premarket trading and may fall further. The catch is the price action is at a fairly significant support target that could result in a dead cat bounce at the very least. If support holds at this level, we expect to see the price action trend sideways for some time before it is able to stage a significant comeback. If not, this stock could shed another 33% and move down to the $40 range.
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Article by Thomas Hughes, MarketBeat