The Consumer Discretionary sector includes stocks that cover a wide variety of the Retail industry. Because there are so many retail companies that offer different products to consumers, it’s hard to pinpoint any kind of specific niche. This is a sector that has performed pretty well this year; as measured by the S&P 500 Consumer Discretionary sector (XLY) increasing almost 21% year to date.
Because of the wide disparity of retail business types, the sector includes an industry category called Specialty Retail. Stocks in this industry include department stores like Kohl’s (KSS) and electronic and gadget stores like Best Buy (BBY), to name just a couple for illustration purposes. Another stock in this industry that is interesting, in part because of the way it hasn’t followed the sector’s trend is Dick’s Sporting Goods Inc. (DKS). Over the last month, the Consumer Discretionary sector has rallied a little over 3.5% from a May low point, DKS has struggled, dropping almost -22% since its mid-May high.
Another reason DKS is interesting is in the way it has responded to industrywide pressures to adapt to changing consumer preferences and intensifying competition. Like a lot of retail companies, DKS has been forced to contend with the fact that consumers increasingly prefer to buy online versus traditional, in-store shopping; another area that has seen the type of competition change comes from big-name suppliers like Nike, Under Armour, and more that have themselves made moves to decrease their reliance on traditional retailer in favor of their own e-commerce delivery systems. DKS is pushing their own online commerce business forward, bringing their online presence in-house versus using a third-party provider, and expanding the scope of private label brands to counter supplier pressure. They have also bucked the industrywide trend, which has decreased the presence of traditional, big-box stores by expanding their national footprint via acquisition of properties, largely from now-defunct competitors. Together, does it all translate to a useful value in a sector that looks poised to keep performing well? Let’s find out.
Fundamental and Value Profile
Dick’s Sporting Goods, Inc. is an omni-channel sporting goods retailer offering an assortment of sports equipment, apparel, footwear and accessories in its specialty retail stores primarily in the eastern United States. The Company also owns and operates Golf Galaxy, Field & Stream and other specialty concept stores, and Dick’s Team Sports HQ, an all-in-one youth sports digital platform offering free league management services, mobile applications for scheduling, communications and live scorekeeping, custom uniforms and FanWear and access to donations and sponsorships. The Company offers its products through a content-rich e-commerce platform that is integrated with its store network and provides customers with the convenience and expertise of a 24-hour storefront. It offers products to its customers through its retail stores and online. The Company offers hardlines, which include items, such as sporting goods equipment, fitness equipment, golf equipment, and hunting and fishing gear. DKS’s current market cap is $2.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased a little over 5%, while were mostly flat, but positive at .5%. In the last quarter, earnings declined -42%, while sales dropped by almost -23%. Like most retailer, DKS’s margin profile is pretty narrow; over the last twelve months Net Income was about 3.75% of Revenues, but decreased somewhat to a little under 3% in the last quarter – a confirmation of the struggle the entire industry has faced.
Free Cash Flow: DKS’ free cash flow is healthy, at about $313 million over the last twelve months. That translates to an attractive Free Cash Flow yield of 13.6%.
Debt to Equity: DKS has a debt/equity ratio of 1.67. This is a high number that also represents a massive jump in the last quarter, when it was just .03. Their balance sheet also reflects their very high degree of leverage, with $3 billion in long-term debt versus just $92 million in cash and liquid assets. While servicing their debt doesn’t appear to be a concern for now, these numbers, along with their narrow margin profile do raise the question of the company’s liquidity moving forward. The lion’s share of the increase in debt is also attributable to DKS’ aggressive push to expand and open more stores nationwide via acquisition.
Dividend: DKS pays an annual dividend of $1.10 per share, which translates to a useful yield of 3.25% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DKS is $20.01 per share and translates to a Price/Book ratio of 1.69 at the stock’s current price. Their historical Price/Book average is 2.5, which suggests that the stock is undervalued by about 48% and puts the stock’s long-term target price at around $50 per share. Their Price/Cash Flow ratio is also encouraging, since it is currently running about 21% below its historical averages. That ratio puts a long-term target price at about $41 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last two years of market activity for DKS. It also traces the stock’s generally upward trending movement from November 2017, around $24 to about $41 per share. From that point, the stock has dropped to about the $35 price level, with significant bearish pressure pushing it below the 382.% Fibonacci retracement line. It does appear to have strong support in the $33 price range based on recent pivot lows. The stock would really need to break resistance at around $37 per share to reverse its current short-term momentum and show any kind of upward near-term strength. If it does, there should be a pretty good shot at seeing the stock revisit its highs at around $41; but if the stock drops below $33, it will probably not find new support until about $30, where the 61.8% retracement line sits.
Near-term Keys: DKS has some useful fundamental strengths, including an attractive dividend yield and healthy free cash flow to go along with an attractive value proposition. There are enough, significant fundamental holes, however from the company’s high debt load to declining Net Income that I think the smart thing is to wait for a bit and see if future earnings reports indicate their current expansion strategy and other business modifications are paying off as they hope before looking at DKS as a useful long-term investment. From a short-term perspective, you could see an interesting opportunity to buy the stock from a break above resistance at $37; that could be useful as a signal to buy the stock or work with call options with an eye on an exit target in the $40 to $41 range. A drop below $33, on the other hand could offer an interesting opportunity to short the stock or to buy put options, with the stock’s next support around $30 in sight.