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Dicks Sporting Goods Inc (DKS), Big 5 Sporting Goods Corporation (BGFV), Hibbett Sports, Inc. (HIBB): Did the Market Hand You a Post-Earnings Opportunity?

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Dicks Sporting Goods Inc (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 Sporting Goods Corporation (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 Sporting Goods Inc (NYSE:DKS) 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.

Dicks Sporting Goods Inc (NYSE:DKS)

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 Sporting Goods Inc (NYSE:DKS) 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 Sporting Goods Inc (NYSE:DKS) 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 Sporting Goods Inc (NYSE:DKS) competitor Big 5 Sporting Goods Corporation (NASDAQ:BGFV) lost 20% of its value following its recent quarterly report. In Big 5 Sporting Goods Corporation (NASDAQ:BGFV)’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 Sporting Goods Inc (NYSE:DKS), Big 5 Sporting Goods Corporation (NASDAQ:BGFV)’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 Sporting Goods Corporation (NASDAQ:BGFV) 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 Sporting Goods Corporation (NASDAQ:BGFV) has room to expand its margins.

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