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 category, there were significant challenges even before COVID-19 became a global pandemic. Declining revenues in traditional brick-and-mortar stores were already a theme before 2020, 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 prompted a lot of consolidation and attrition that included a number of established names declaring bankruptcy and who are now out of business. Along with the ongoing health crisis retailers everywhere have been pressured to close stores while also scrambling to build omnichannel revenue streams.
In the sporting goods segment, all of that turmoil have really left just one established name standing: Dick’s Sporting Goods (DKS). While they’ve been forced to close selected 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 removal of assault rifles from 850 of 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 has been well-positioned to take advantage of pandemic conditions – and that I think will continue to be well-positioned for what I believe will be a long-term, enhanced focus on health, wellness and physical activities, it is this category.
Despite having to weather the same storm every other retailer has for the last two years, DKS has come out in a stronger financial position, with minimal to non-existent long-term debt, healthy liquidity, and improving free cash flow. After suspending their dividend in April 2020 in response to the pandemic, management reinstated the dividend just one quarter later, signaling the strength in their management focus and their long-term strategy. That commitment was further bolstered in the company’s latest earnings statement in September, when they increased the quarterly scheduled payout while also announcing a one-time special dividend of $5.50 per share that was part of management’s effort to return about $1 billion in total value to shareholders through either dividend payout or stock buybacks.
The strengths I’ve just described are all big reason the stock pushed to a high in the first week of September at around $147 per share. After dropping back to around $113 in mid-October, the stock rallied again to a peak last week at around $140; but the market’s increase in volatility since then, which has been fueled by uncertainty from the latest reported coronavirus variant and stoked by the Fed’s stated intention to consider speeding up the reduction of the bond-buying program that has been a part of their interest rate policy since before the pandemic arrived has pushed the stock back near to that October low point. With the Fed appearing to shift its focus away from the health of the jobs market to controlling inflation, the risk that the market’s bearish volatility could continue. What does that mean for stocks like DKS? Have the dropped enough already to mark them as useful value candidates, or is there still more downside risk to be cautious about? Let’s dive into the details and see what we can find.
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 $9.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 58.7%, while sales improved by nearly 14%. In the last quarter, earnings declined -37.2%, while sales dropped by a little over -16%. DKS’s margin profile has historically been narrow, but strengthened from about 4.5% on a trailing twelve-month basis in December 2020. Over the last twelve months Net Income was about 11.55% of Revenues, and 11.52% in the last quarter.
Free Cash Flow: DKS’ free cash flow is very healthy, at about $1.3 billion over the last twelve months. That translates to a Free Cash Flow yield of 13.24%. It should be noted that Free Cash Flow increased from pre-pandemic 2020 from around $187 million.
Debt to Equity: DKS has a debt/equity ratio of 0.17. This is a very low number that reflects a conservative approach to leverage. Their balance sheet shows $441 million in long-term debt versus $1.37 billion in cash and liquid assets.
Dividend: DKS pays an annualized dividend of $1.75 per share, which translates to an annualized yield of 1.53% at the stock’s current price. it is also worth mentioning that the company suspended their dividend at the beginning of 2020, and then reinstated in the last quarter of that year at a rate of $1.25 per share. The special dividend that was distributed in the last quarter was a one-time event; while that was wonderful for shareholders at the time, and speaks to management’s confidence moving forward, it shouldn’t be considered for future, passive income purposes.
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 $118 per share. That means that at the stock’s current price, it is close to fairly valued, with about 3% upside from its current price, and a useful discount price sitting at around $94.50.
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 upward trend from a low a year ago at around $51.50 to its September peak above $63. The stock dropped off of that high and established a pivot low at around $113, a little above the 38.2% retracement line that should offer new support to the stock, as it has dropped off its latest pivot high and is sitting around $115. Immediate resistance appears to be at around $125 based on pivot activity seen in September and October at that level. A push above $125 should give the stock room to push to about $135 to next resistance, while a drop below $113 should have limited downside to about $111, inline with the 38.2% retracement line. If bearish momentum accelerates, however, the stock could fall to next support at around $103, which is just a little above the 50% retracement line.
Near-term Keys: DKS has been one of the most interesting speciality retail stocks on my long-term watchlist for some time. The company has countered significant pressure from online retailers and direct sales from companies like Nike, Under Armour and so on by taking advantage of selected opportunities to buy assets and properties from failing brick-and-mortar competitors, and using them, along with currently open stores to provide a way to differentiate from its larger, online-focused competitors (including suppliers pushing harder to focus on direct sales). The stock has dropped quite a bit in the last month, but needs to drop even more before it can rightfully be considered a good value. That means that the best probabilities to work with DKS for now are with short-term trading strategies. A bounce off of support at $115 could be an interesting signal to consider buying the stock or working with call options, using $125 as a practical exit target, while a drop below $111 would be a strong signal to consider shorting the stock or buying put options, with an eye on $103 as a useful profit target on a bearish trade.