The news is already making Dick's Sporting Goods' (DKS) fourth-quarter earnings results all about gun sales. It would be easy to base your reaction to their results solely on that subject matter, as it's a hot button issue.
But to truly make a good judgment on the stock, you have to dig deeper. You also have to look at the longer term. Considering how bricks and mortar has suffered to the wrath of e-commerce, I think there's more to this than simply sales declines from a harder stance on guns.
Retail is tough right now, plain and simple. There's a balancing act here between value and potential. Going off Dick's 2019 guidance, DKS is cheap after today's pullback. The company maintained solid sales revenue growth through the past five years.
Yes, backlash from the company's policies on gun sales are a contributing factor in the short term, but if it's true, then the sales fallout from it should be relatively limited. Dick's product lineup is vast and extends well beyond firearms. The question is whether the sporting goods giant can revamp things from here. If Dick's can, then the stock offers value.
I pointed out back in November that DKS was squeezing higher earnings out of lower sales. Dick's reported earnings growth in the third quarter largely thanks to share buybacks. Fourth-quarter buybacks were not enough to keep that story going.
On an adjusted basis for the calendar shift (there was a fiscal 53rd week in 2017), consolidated same-store sales decreased 2.2%. Net sales at Dick's decreased 6.5% to $2.49 billion. Fourth-quarter diluted earnings per share were $1.07 vs. $1.11 in 2017.
Be mindful that the extra week played a role here. To me, the nicest news in the fourth quarter was the 17% increase in e-commerce sales. The strength of Dick's digital presence demonstrates the sporting goods retailer can compete in the online space that has been largely dominated by a few names (I don't think I need to mention them).
For the full year, diluted earnings increased $0.23 year over year to $3.24. Accounting for today's 10% pullback, DKS stock has a trailing P/E of around 10.8 (at the time of writing).
Going off of guidance for 2019, the stock doesn't seem bad at these levels, either. Guidance for 2019 has earnings of $3.15 to $3.35 per share. Conservatively, that would give Dick's a forward valuation of around 11.1x 2019 earnings estimates.
The value is here, with a strong dividend to boot. It simply becomes a question of whether this sales story can right itself. The earnings guidance leaves room for earnings to decline year over year. That kind of pressure could press the stock even further.
Dick's CEO, Edward Stack, said in the earnings release the company expects to return to positive comp sales growth in the second quarter of 2019; with full-year comp sales growth being 0%-2%.
If Dick's can play catch up on e-commerce, and balance its store sales, I think DKS might be trading at a strong value. It's just a big "if" at the moment. I therefore view Dick's Sporting Goods as a "hold."
The value makes it too cheap to sell, but it's not clear that things can run higher yet. At over $113 million, there's plenty of cash on hand, and the equity strength of the balance sheet remains solid.
This is kind of a defining time for retailers like Dick's. Can they adapt their style to counter names like Amazon.com, Inc. (AMZN) ? I think many can.
The pricing on DKS is so good that it seems worth holding on to in order to find out.