Should You Buy the Dip at Dicks Sporting Goods Inc (DKS)? – Wal-Mart Stores, Inc. (WMT), Cabelas Inc (CAB)

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Dicks Sporting Goods Inc (NYSE:DKS), the American sports superstore that also operates Golf Galaxy, recently stunned investors with bleak fourth quarter earnings and a soft outlook for the coming year. As a result, shares plunged more than 10% after its fourth quarter earnings announcement on March 11.

Wal-Mart Stores, Inc. (WMT)In my opinion, this panicked sell-off has created a possible investment opportunity for patient investors. In this article I’ll examine the strengths and weaknesses of Dick's, which survived the recession and emerged far stronger than many of its industry peers.

Fourth Quarter and Full Year

For its fourth quarter, Dicks Sporting Goods Inc (NYSE:DKS) earned $1.03 per share, or $129.7 million, a 17% increase from the $0.88 per share, or $111.1 million, it reported a year earlier. Yet that missed the Thomson Financial estimate of $1.06 per share.

Revenue came in at $1.81 billion, a 12% gain from the prior year’s $1.61 billion, but it also came up short of the consensus estimate of $1.87 billion.

Looking ahead, things don't look much better.

For its first quarter, Dick’s expects to earn $0.47 to $0.49 per share in the first quarter, below the average forecast of $0.50.

For next year, the company forecasts earnings of $2.84 to $2.86 per share, lower than the consensus estimate of $2.92 per share.

Granted, these numbers weren't great - but were they really bad enough to justify such a slide? Let’s delve into the company’s strengths and weaknesses.

That crazy weather

During the winter, Dicks Sporting Goods Inc (NYSE:DKS)’s reported strong sales of athletic footwear, clothing and hunting products. The strength in these categories was in line with growth across the overall industry. Athletic footwear and apparel retailer Foot Locker, Inc. (NYSE:FL) recently posted robust same-store sales growth, while gun makers Smith & Wesson Holding Corporation (NASDAQ:SWHC) and Sturm, Ruger & Company (NYSE:RGR) both reported strong demand for hunting rifles.

However, those gains were offset by lower sales of fitness products, outerwear and cold weather accessories. The company attributed this decline to an unusually warm December followed by a colder January and February in many parts of the country.

CEO Edward Stack stated that the warm December caused the company to reduce inventory levels of cold weather merchandise in anticipation of a warmer January and February, to “align with lower consumer demand and avoid carrying over excess inventory.”

Although that was a shrewd move to manage inventory and protect margins, it limited the retailer’s ability to capitalize on the unexpected surge in demand for cold weather merchandise in January and February. As a result, inventory per square foot rose 0.7% from the prior year quarter.

Margins and expenses

The company’s margins have remained relatively stable over the past three years since the recession.

DKS Operating Margin TTM data by YCharts

However, a divergence of operating and profit margins in early 2012, coupled with a sudden surge in SG&A (sales, general and administrative) expenses sticks out like a sore thumb - but investors shouldn't be too concerned, since the company still has $294.49 million in cash and only $22.74 million in outstanding long-term debt.

Same-store sales & expansion

During the quarter, Dicks Sporting Goods Inc (NYSE:DKS)’s reported weak consolidated same-store sales growth of 1.2%. Both segments posted fairly weak growth, but online sales surged.

Same-store Sales Growth by Segment (Brick & Mortar and E-Commerce Separated):

Dick's Sporting Goods: -2.2% Golf Galaxy: +1.3% E-commerce: +54.2%

However, since its e-commerce segment includes online sales from Dick’s and Golf Galaxy, we should also look at same-stores sales by chain, with e-commerce included.

Same-store Sales Growth by Chain (Brick & Mortar and E-Commerce Combined):

Dick's Sporting Goods: +1.2% Golf Galaxy: +1.3%

As we can see, Dick’s namesake stores were the primary beneficiary of its e-commerce business. For the full year, same-store sales across all segments rose an average of 4.3%.

During the quarter, the company opened seven new Dicks Sporting Goods Inc (NYSE:DKS) stores. The company finished the fourth quarter with 518 Dick’s Sporting Goods stores in 44 states, and 81 Golf Galaxy stores in 30 states.

The company also plans to spend the remainder of 2013 investing in areas of higher growth. These include:

  • Remodeling existing stores
  • Testing "pick-up in store," meaning online purchases can be instantly picked up at retail locations
  • Strengthening mobile capabilities via improved mobile sites and apps
  • Implementing "new systems" and "new concepts" in stores to spur growth

In addition, the company recently approved a stock repurchase plan of $1 billion to be implemented over the next five years. Although I’m not a big fan of stock repurchases - since that money could be better spent elsewhere on new innovations and store expansions - buying back stock after its recent plunge should be beneficial to existing shareholders.

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