Dicks Sporting Goods Inc (NYSE:DKS) has recently experienced a significant drop of nearly 11% in one trading day, because the company’s earnings results missed analysts’ expectations. The fourth quarter earnings came in at $1.03 per share, lower than Wall Street’s estimate of $1.06 per share. At the current price of more than $45 per share, it is trading around its 52-week low. Is a recent significant drop a buying opportunity for investors? Or should we stay away due to the company’s earnings miss? Let’s find out.
Business snapshot
Dick’s Sporting Goods is an authentic full-line specialty retailer of sporting goods equipment, apparel and footwear, operating 518 Dicks Sporting Goods Inc (NYSE:DKS) stores in 44 states and 81 Golf Galaxy stores in 30 states. The majority of its revenue, around 52% of the total revenue, was generated from hardlines sales, including sporting goods, fitness and golf equipment. Apparel ranked second, accounting for about 29% of the total revenue while footwear contributed around 19% of the total sales. The company has a diverse supplier base, as it purchases merchandise from around 1,200 vendors. Since 2010, Dick’s Sporting Goods has experienced consistent growing same store sales. The company enjoyed a same store sales growth of 7.2% in 2010, 2% in 2011 and 4.3% in 2012.
A cash cow with historical consistent performance
Over the past ten years, Dicks Sporting Goods Inc (NYSE:DKS)’s revenue, net income and cash flow have been on the rise. The revenue has grown from $1.47 billion in 2003 to nearly $5.84 billion in 2012, while the net income has risen from $86 million to $290.7 million during the same period. It only experienced a loss of $35 million in 2008, due to $164.25 million impairment charges of goodwill and intangibles. What interests me is the fact that Dick’s Sporting Goods’ seems to be a great cash-generating machine. Its operating cash flow has increased from $87 million to $438.3 million for the past ten years, whereas the free cash flow has surged from $32 million to $219 million in the same period.
Little leverage employed in the business
In the retailing business, a retailer might miss quarterly earnings results or miss a short-term fashion trend. However, it’s critical for retailers to have a strong balance sheet to weather the short-term headwinds. Dicks Sporting Goods Inc (NYSE:DKS) has a quite conservative capital structure. As of February, the company had $1.59 billion in total stockholders’ equity, $345.2 million in cash and only $16 million in long-term debt and leasing obligations. In the past twelve months, Dick’s Sporting Goods have spent nearly $200 million to repurchase shares. The company also announced another share buyback program of as much as $1 billion.
The dominating player with the most expensive valuation
At the current trading price of around $45 per share, Dick’s Sporting Goods is worth about $5.6 billion on the market. The market values the company at 9.6 times EV/EBITDA. Compared to its peers including Foot Locker, Inc. (NYSE:FL) and Finish Line Inc (NASDAQ:FINL), Dick’s Sporting Goods seems to have the most expensive valuation. Foot Locker, at a current trading price of around $33 per share, has the total market cap of more than $5 billion. It is valued at only 5.72 times EV/EBITDA, a much cheaper valuation. The smallest company among the three is Finish Line Inc (NASDAQ:FINL). It is trading at nearly $19 per share, with a total market cap of more than $920 million. It is also valued the cheapest, at 4.85 times EV/EBITDA. The highest valuation of Dick’s Sporting Goods might be due to its fast growth earnings. In addition, it is the dominating player, with a 8.5% market share in the U.S. sporting-goods market, while Foot Locker, Inc. (NYSE:FL) owns around 6% market share.
Among the three, Foot Locker generated the highest operating margin at more than 10%, while the operating margins of Dick’s Sporting Goods and Finish line were 8.8% and 8.63%, respectively. Dick’s Sporting Goods pays to existing shareholders the lowest dividend yield at 1.1% while the dividend yield of Foot Locker, Inc. (NYSE:FL) is the highest, at 2.2%, and Finish Line Inc (NASDAQ:FINL) pays 1.4% dividend yield.
My Foolish take
Even after a daily significantly drop of nearly 11%, Dick’s Sporting Goods does not seem to be cheap. I personally think it is still relatively overvalued compared to its peers. I would rather wait for a much cheaper price before initiating a long position in this stock.
The article Is This Sporting Goods Retailer a Buy After an 11% Daily Drop? originally appeared on Fool.com and is written by Anh HOANG.
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