At the end of 2018, Dick's Sporting Goods (DKS) appeared on the mend. My investment thesis was neutral on the stock due to discouraging traffic trends. The leading sports retailer just raised FY19 EPS estimates, yet the stock is actually a few dollars lower now. The return to positive traffic trends and the combination with a cheap stock value finally makes Dick's Sporting Goods a buy.
Positive Traffic Trends
My hesitation to buy the stock last year at over $35 was the struggles with the eCommerce division and the general lack of store traffic. A retailer isn't going to survive and thrive in this environment without a strong strategy to capture sales outside the store. The store needs to become as much as a distribution hub as a sales destination.
For FQ2, Dick's generated 3.2% comp sales growth led by a 21% increase in eCommerce sales and a 1.1% increase in traffic. Last FQ3, comp sales were down 3.9%, but more importantly online sales only increased 16%. The sports retailer wasn't doing well enough online to warrant an investment.
Now, the company is wisely shifting from the hunting category that doesn't necessarily fit with team sports and the athletic apparel fundamental focus of the stores. Anybody visiting a Dick's store would realize that the company lacks in footwear depth and traditional seasonal sports gear that is no longer seasonal. For this reason, the company is actually seeing strong success with the initial 10 stores that stripped out the hunting category products for strategic local assortments.
This move combined with the HitTrax batting cages and future VIP events will help make the store a destination place for athletes.
Improving EPS Trends
When last analyzing the stock, Dick's traded at nearly $35 with the company forecasting FY18 EPS at $3.15 to $3.25. Now the company is predicting FY19 EPS at $3.30 to $3.45. The mid-point estimate is up from $3.20 to $3.375 or nearly $0.18 higher while the stock is down to only $32.
The market appears far too negative on the stock this time. The company is making progress into turning Dick's into a true omni-channel sports retailer with the store becoming more of a destination place to try out new goods such as the bats with the batting cage or pick up online orders in a quick and efficient fashion.
The stock now trades at only 9.3x forward EPS estimates. Dick's has traded in a general range over the last year with anything below 10x towards the lower end of the price range.
Dick's Sporting Goods now offers a surprisingly high 3.3% dividend yield. When combined with the large share buyback of $160 million spent in the recent FQ2, the company is providing substantial capital returns to a stock with a market cap of only $3 billion. The company recently approved another $1 billion share buybacks for the next five years that would repurchase one third of the company in that time period.
The Trump tariffs on additional Chinese goods at higher than anticipated rates have the potential to impact the predicted improving EPS trends. The company forecast includes 10% tariffs and Trump is pushing the tariff to 15% based on retaliatory tariffs from China.
Takeaway
The key investor takeaway is that Dick's has finally completed a turnaround that has the stores shifting more to a destination to try out sporting goods. Investors should use any weakness from Chinese trade wars as an opportunity to load up on a proven winner in the retail space trading at close to 9x EPS estimates.
