I think Dick's Sporting Goods (DKS) first quarter results was more about new guidance rather than results. Yes, the stock jumped on the earnings beat vs. estimates Wednesday morning, but net income actually declined. DKS relied on further share decreases in order to create that earnings beat on a per share basis. (The shares have since declined, and were down about 6% in early afternoon trading.)
Long term I don't like that strategy. But the sports retailer did alter its full year guidance in a promising way, and seems to be making progress in its attempts to drive online growth. Forecasting also paints a much better same store sales picture versus 2018.
To me this remains a question of where the retailer's earnings come from. Right now, they continue to come from share buybacks. Revenues increased 0.6% to $1.92 billion, but increased expenses cut into operating margins. Net income was $57.52 million vs. $60.08 million a year ago. Diluted shares outstanding declined by 7.6%, which allowed for a $0.02 increase in earnings year over year. Diluted earnings per share were $0.61 on a GAAP basis. On a non-GAAP basis, earnings were $0.62 per share vs. expectations of $0.58 per share on an adjusted basis. I would like to see those earnings derived from higher overall net income, rather than spending money on share decreases. That capital could be going into innovation.
In terms of growth, Dick's reported flat same store sales. The company's guidance was very conservative, and this fell into their range of expectations. If you want to look deeper into this, you have to go off of CEO Ed Stack's commentary. Stack noted that the retailer's same store sales actually "turned positive in March", and that the sales "remained positive in April". The positive trend must be carrying over well, as Dick's new full year 2019 guidance includes same store sales growth forecasts of 2% at the high end, and slightly positive at the low end. Bear in mind this is only a slight change from the guidance provided in the fourth quarter of 2018.
The shining area in the first quarter was unsurprisingly digital. E-Commerce sales increased 15% in the first quarter. Representing 13% of sales in Q1, the online presence gained 2% of net sales year over year. This remains a reminder that many retail names are capable of making e-Commerce a part of their business plan.
DKS shares have had a wild ride over the last few years. After trading in the $60's in 2017, DKS experienced a revaluation through last year as the stagnation began to become more apparent. I've said many times now that I believe that pullback created some serious value potential if Dick's Sporting Goods can prove its ability to reinvigorate sales. The new guidance might be the start of that, but we're still in the early stages.
One could attempt an early move on the CEO's rhetoric about how same store sales turned positive in March, but the full year guidance hasn't exactly changed the story very much. Overall retail seems to be a little shaky, and one has to wonder if DKS can continue the push this late in an economic cycle. I think one has to be really picky within retail. $3.40 per diluted share, the high end of full year guidance, would give DKS a forward P/E ratio of 10.64. Yes that's cheap, but current retail valuations don't suggest that investors will allow that ratio to rise too far without some serious good news.
I'd call DKS a "hold" thanks to the dividend.