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. In the sporting goods niche, there were significant challenges even before COVID-19 became a global pandemic. Declining revenues in traditional brick-and-mortar stores, in part coming from a big shift into online-driven sales and a brands like Nike, Adidas and others pivoting away from those stores to deliver directly to consumer through their own methods. Those changes forced a number of established names to declare bankruptcy and go out of business. It’s been a common theme for a lot of retail businesses, who have been forced to close stores and scramble to build omnichannel revenue streams.
In the sports goods industry, that’s really left just one established name standing: Dick’s Sporting Goods (DKS). While they’ve been forced to close locations to cut costs, they’ve also been proactive about taking advantage of bankruptcies and the difficulties of their competitors, bidding at bankruptcy auctions for businesses they wanted to add to their corporate portfolio and acquiring locations throughout the U.S. from others. They’ve also worked hard to develop their own online channel, and responded to the shift of major suppliers to sell directly to consumers by adding their own private labels. They’ve also taken an active role on social issues, including the termination of assault rifles in their stores well before larger competitors like Walmart decided to do the same.
The pandemic has, not surprisingly put pressure on DKS’ business just as it has most of the retail world, but analysts like to point out that if there is a retail segment that is positioned to take advantage of pandemic conditions that include social distancing requirements and what many are starting to call the “homebody economy,” it could be sporting goods. Limited access to gyms – which in some parts of the country have been closed all over again as infections keep increasing – have forced more and more people to find their own ways to stay active. That means buying equipment, apparel and so on to accommodate not only work-at-home requirements but also workout-at-home.
DKS is one of the stocks that have rebounded strongly from March, bear market lows. After plunging to a low around $13.50, the stock has rallied to just a little below $45 as of this writing. Is that driven by strength in their business? And if it is, what does that mean about the stock’s value proposition with the stock just a few dollars below its 52-week, pre-pandemic high? 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 $4.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased -295%, while declined -30.5%. In the last quarter, earnings declined -191.6%, while sales dropped by a little over -49%. Like most retailers, DKS’s margin profile is razor thin, with the pandemic really making things more difficult; over the last twelve months Net Income was about 0.85% of Revenues, declining to -10.76% in the last quarter. That’s a big concern, even if it isn’t altogether surprising.
Free Cash Flow: DKS’ free cash flow is modest, at about $181 million over the last twelve months. That translates to a Free Cash Flow yield of 5.11%. It should be noted that Free Cash Flow dropped from more than $500 million at the beginning of 2019, but actually improved from before the pandemic when it was around $111 million.
Debt to Equity: DKS has a debt/equity ratio of 1.09. This is a high number that also represents a massive jump in the last quarter, when it was just .13. Their balance sheet shows $1.42 billion in long-term debt versus $1.48 billion in cash and liquid assets. While servicing their debt doesn’t appear to be a concern for now, it should be noted that cash was just $69 million at the beginning of the year, while long-term debt was around $224. That means that the company has borrowed heavily to bolster their cash position in order to ride through current difficulties. That isn’t a bad thing, but it does present an additional element of risk to consider.
Dividend: DKS has suspended its dividend payout for the time being in an effort to save cash, but has not provided guidance on when they expect to resume the dividend.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target for DKS at around $43 per share. That means that at the stock’s current price, it is overvalued by about -3% from from its current price, with a useful discount price sitting at around $35 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 year of market activity for DKS. The red diagonal line traces the stock’s slide over the period of January to March from a high around $50 to a low at around $13.50. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock’s upward trend from its March low is easy to see, with the stock currently sitting just a little below the 88.6% retracement line, which is where I put current resistance. Support is around $41, where the stock broke previous high resistance earlier this week. A break above $45.50 has room for the stock to keep rallying to around $50 per share, while a drop below $41 could give the stock room rom to drop to the last pivot low, which came around $38, or $36 where the 61.8% Fibonacci line sits.
Near-term Keys: While I like the idea that DSK could benefit from a consumer shift towards sporting goods under current conditions, I don’t think it is being reflected in the company’s current numbers in any useful way. I also think that means that the stock’s downside is much more severe than the -3% difference between its current price and my “fair value” target, which is why there is no way I would try to work with DKS on any kind of a long-term basis right now. If you prefer to work with short-term trades, you could take a break above $46 as a signal to buy the stock or work with call options, using the January high at near $50 as a useful profit target point. If the stock drops back below $41, consider shorting the stock or working with put options, using $38 to $36 as a useful range to take profits on a bearish trade.