DKS is down -26% from its yearly high. Should you think about buying it yet?

The advent of a new year brings with it the prospect of new challenges and new opportunities to embrace. Whether you are the type to set New Year’s resolutions or not, for most of us turning the calendar from one year to the next usually includes some thought about what’s happened and what’s coming up. That process usually also means thinking about what we aspire to do or become in some sense.

A lot of resolutions follow familiar themes, like paying off debt, saving up for a major purchase, or spending more time with family and less time at work. Another one that seems like a natural fit after spending a month or so celebrating the holiday season is to get healthier, whether that means losing weight or simply making better dietary choices and being more active. When you add to the mix the fact that the pandemic of the past two years has continued to put a greater focus on individual health and wellness. That is among the reasons that the strongest retail companies have been able to survive the difficult conditions of these last two years.

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, national 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 a leading 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.

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, as well as healthy liquidity and 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 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 in mid-November at around $140 before broad amrket uncertainty forced the stock to a pre-Christmas low at around $100 per share. With the Fed appearing to shift its focus away from the health of the jobs market to controlling inflation, and omicron-driven infections spiking at record levels in various parts of the country, the risk that the market’s bearish volatility could continue could be increasing. What does that mean for stocks like DKS? Have this stock dropped enough already to mark it as a useful value candidate, 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 $9.4 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 14.34%. It should be noted that Free Cash Flow increased from pre-pandemic 2020 from around $187 million, but has also dropped from about $1.9 billion in mid-2021.

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. Note that cash has decreased from $2.2 billion in the last quarter and $1.8 billion in the quarter prior. This could be cyclical occurrence, in which case these numbers should shift back in a positive fashion in the quarters ahead, but for now it is a warning sign to keep in mind.

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 September 2020 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 $115.50 per share. That means that at the stock’s current price, it is only somewhat undervalued, with about 7% upside from its current price, and a useful discount price sitting at around $92.40.

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 $64.20 to its September peak above $147. The stock dropped off of that high and finally found a bottom in mid-December at around $100, a little above the 61.8% retracement line before picking bullish momentum again into the new year. Immediate resistance is at the $115 peak at the start of January, and current support is around $106, close to the 50% line. The stock has been holding a little above that level for the past couple of days. A push above $115 could see the stock rally to about $122, based on consolidation activity in October. A drop below $106 should find next support at about $102, where the stock found significant resistance in June and July of last year, with additional downside to $96 possible if selling activity increases.

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 suppliers-turned-competitors 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. The stock has dropped quite a bit in the last few months, 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 push above resistance at $115 could be an interesting signal to consider buying the stock or working with call options, using $122 as a practical exit target, while a drop below $106 would be a strong signal to consider shorting the stock or buying put options, with an eye on $102 as a useful profit target on a bearish trade.