Sometimes Wall Street gets a little too excited about a company "beating" estimates.
Dick's Sporting Goods (DKS) created good earnings growth in the third quarter, but there's definitely more to be done. Before Dick's can establish real strength behind its stock, there needs to be more on the sales side.
I like the way the company is managing earnings, but long term, that won't make up for the declining overall sales. It's a trend that must be stopped. And, in my opinion, it needs to be stopped soon.
I would have to rate Dick's a "Hold" until we see a fix to same-store sales growth (or lack thereof). The current earnings strength will help keep the stock steady, but I don't see it driving DKS into a big rally.
The Fundamental Business Still Has a Problem
Net sales were down 4.5%, year to year, in the third quarter. That revenue of a little under $1.9 billion was more than enough for Dick's to put up a solid quarter overall, but it's still not a good thing. The story of the third quarter lies more in how the retailer has curbed its spending in order to derive value from lower overall sales.
Gross profits declined 2% to $523.6 billion, so the real bulk of what made the third quarter what it was involved improved gross margins, share buybacks, and lower overall taxes year over year. Operating income was boosted 5.7% to $52.86 million. Thanks to a decrease in "other income," income before taxes fell roughly $7.8 million year over year to $50.19 million.
Still Delivered Earnings Growth
Net income increased 2.5% (I rounded up) to $37.8 million. I wouldn't call that remarkable growth considering how it was achieved, but it is growth nonetheless. Thanks to a 7.5% decrease in diluted shares outstanding from last year, net income translated to $0.39 per diluted share vs. $0.35 in the year-earlier period.
I believe management would be better off playing the long game. Rather than spending on share buybacks, I'd like to see all of its resources being put back into the business. It's a troubling trend that seems all too prevalent these days. Quiet the shareholders with buybacks, lay a fog over the weakness of the core business. In the short term it might be nice for investors, but long term it limits opportunity.
It's nice to see that Dick's is building its digital business. Every retailer that wants to survive Amazon (AMZN) must get in on the online game. Dick's online sales increased 16% in the quarter. They represented 12% of the company's total sales in the third quarter. I expect this figure to only increase through time. Alas, from the overall drop in revenues, online sales have not been enough to stem the decline overall.
There's a lot to worry about right now with Dick's Sporting Goods. The company's opening new stores while their comp stores are suffering sales declines. It has declining total equity thanks to borrowings and lower cash levels.
The saving grace is the stock is cheap. At Wednesday's close of $37.26, the shares are trading at a multiple of a little under 12 times the low end of full-year earnings guidance of $3.15 per diluted share.
Whether that cheap price tag is worth a look right now is debatable. I foresee problems if Dick's can't fix its sales issue. The upcoming fourth quarter and holiday season are going to tell a lot about whether the sports retailer has what it takes to right the ship. Again, I call Dick's a Hold at this time.