Moody’s Investors Service assigned a Baa3 senior unsecured rating to Dick’s Sporting Goods, Inc. proposed $1 billion unsecured notes. The proceeds will be used to repay the company’s $575 million convertible debt, add cash to the balance sheet, and for general corporate purposes. The outlook is stable.

Ratings Rationale
Moody’s said, “Dick’s Baa3 senior unsecured rating reflects its large scale and leading market position as the US’ largest sporting goods chain in the highly competitive sporting goods sector. Dick’s geographic diversification and product assortment continue to drive solid performance that we expect will continue to generate good (although moderating) operating earnings and cash flow. The company has benefitted from the effects of the coronavirus that forced consumers to remain home. Consumers have focused on self-care and outdoor activities, which strengthened demand for exercise equipment, footwear and apparel. As Dick’s anniversaries, a period of outsized demand and consumers resume spending on travel and leisure activities, Moody’s expects Dick’s rate of revenue and EBITDA growth to slow. Moody’s estimates that Dick’s will generate revenue growth in the low to mid-single digits over the next 12 months. Earnings will benefit from solid repeat business from good customer retention.

“Governance considerations are a key rating factor, particularly Dick’s conservative financial strategies which support good liquidity and low leverage with Moody’s adjusted debt to EBITDA at roughly 1.1x for the twelve months ended October 31, 2021. Moody’s expects the company to maintain debt to EBITDA financial leverage below 1.5x (or 2.5x including Moody’s adjustments) and that Dick’s will only rely on excess free cash flow to complete opportunistic share repurchases. Moody’s also expects that Dick’s financial strategies will support it in maintaining a largely unsecured capital structure including its revolving credit facility. Dick’s long-term growth strategy will largely focus on organic growth. However, it may also include periodic modest leveraging tuck-in acquisitions, but the company’s credit profile will continue to be supported by its conservative financial policy that will sustain debt to EBITDA below 1.5x (or 2.5x including Moody’s adjustments). Dick’s is considered a public controlled company with majority ownership by Mr. Edward Stack. Mr. Stack has a significant amount of influence over the company given the extra voting rights provided by the class B shares he owns. While Moody’s typically views controlled companies as a credit risk, we expect the company to be managed conservatively.

“The rating is also constrained by the competitive nature of sporting goods retail, including the increased focus of major apparel and footwear brands on direct-to-consumer distribution and the consumer shift to online shopping. Demand for products at Dicks is also vulnerable to shifts in consumer preferences, economic cycles and weakness in household income. As consumers return to more normalized spending habits, Moody’s expects sales and earnings growth to weaken. The company is also exposed to increasing social risks as consumers become increasingly mindful of data protection, the treatment of the workforce and responsible production.

“The stable outlook reflects Dick’s solid position in the retail sporting goods segment and that the company will maintain reasonably stable operating performance going forward. The stable outlook also reflects Moody’s expectation that Dick’s will maintain solid liquidity, including the successful refinancing of its revolving credit facility.

“Dick’s has very good liquidity supported by $1.4 billion of unrestricted balance sheet cash as of October 31, 2021, near full availability of its new $1.6 billion unsecured revolving credit facility and good free cash flow of about $700 to $750 million per annum. Moody’s estimates that free cash flow will moderate to about $450-$500 million per annum over the next 12 months as revenue and earnings soften. Moody’s expects the company to maintain at least $1.0 billion of unrestricted balance sheet cash going forward.”

Photo courtesy Dick’s Sporting Goods