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, 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 consumers 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 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 easily manageable 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 has been bolstered even more over the last two quarters, when they announced a one-time special dividend of $5.50 per share and increased the quarterly scheduled payout in both November and this month, all as 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 2021 at around $147 per share. The stock has since dropped back into its bear market level from that high, and begun consolidating between about $100 and $115 per share. Given recent economic indicators that show big increases in inflation, and the Fed implementing the first of multiple expected interest rate increases in March, the risk that the market’s bearish volatility that has characterized 2022 so far will continue seems pretty high. What does that mean for stocks like DKS? Has 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 $8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased almost 50%, while sales improved by 7.25%. In the last quarter, earnings increased a little more than 14%, while sales rose by 22%. 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 a healthy 12.45% of Revenues, and slipped a bit to 10.32% 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 15.11%. 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 a year ago.
Debt to Equity: DKS has a debt/equity ratio of 0.92. This is a company that until the last quarter has very minimal long-term debt, but increased that line item on their balance sheet by about $1 billion. Their balance sheet shows $2.6 billion in in cash and liquid assets versus about $1.5 billion in total long-term debt. The increase in debt isn’t categorically a bad sign, since they have healthy operating margins, and still retain healthy liquidity to service their debt with; but it does bear watching in the quarters ahead to see how management intends to use it.
Dividend: DKS pays an annualized dividend of $1.95 per share, which translates to an annualized yield of 1.95% 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.
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 $81.50 per share. That means that at the stock’s current price, it is clearly overvalued, with about -18% downside from its current price, and a useful discount price sitting at around $65.
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 $76.50 to its September peak above $147. After dropping back to a low in December at around $98, the stock began consolidating between $120 and $105, and lowered that range in February to its current levels, with current support sitting at around $98 and immediate resistance expected at around $110. The stock is current nearing the low end of its range. A drop below $98 should see the stock drop to about $92 before finding next support, while a push above $110 should give the stock momentum to rally to about $120 where the 38.2% retracement line waits to provide next resistance.
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 six months, but frankly needs to drop quite a bit 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 pivot off of support anywhere between the stock’s current price and $98 could provide an aggressive signal to consider buying the stock or working with call options, using $110 as a practical exit target, while a drop below $98 would be a strong signal to consider shorting the stock or buying put options, with an eye on $92 as a useful profit target on a bearish trade.