Shares of Dick’s Sporting Goods jumped 13.3 percent on Wednesday after the retailer reported earnings far ahead of Wall Street’s targets and aggressively raised its guidance for the year. Analysts roundly raised price targets, with many believing Dick’s has proven it has shown structural improvement over the last year. The supply chain disruption was cited among the near-term risks.
Shares closed Wednesday at $129.60, up $15.21 on the day. Shares more than doubled since starting the year at $56.21. They had been trading in the teens in March 2020 when the pandemic arrived.
Highlights of the second quarter include:
- Sales totaled $3.27 billion, up 20.7 percent year-over-year and ahead 45.0 percent compared to the second quarter of 2019. Wall Street’s consensus estimate had been $2.84 billion.
- On an adjusted basis, earnings surged 77.9 percent to $501.2 million, or $5.08 per share, from $281.7 million, or $3.21, a year ago. Results were nearly double Wall Street’s consensus estimate of $2.80.
- Brick and mortar stores comped up nearly 40 percent versus 2020 and 36 percent sales increase compared to 2019.
- E-commerce sales vaulted 111 percent compared to the second quarter of 2019 but, as expected, decreased 28 percent compared to the second quarter of 2020. E-commerce penetration declined to 18 percent for the latest quarter from 30 percent in the year-ago period but was up from 12 percent from the 2019 second quarter.
- Gross margins improved to 39.91 percent, up 538 basis points compared to last year and up 994 basis points versus the second quarter of 2019.
- Stores fulfilled more than 70 percent of online sales either through ship from store or in-store/curbside pickup. Overall, stores enabled over 90 percent of total sales in the second quarter.
- Dick’s sees “strong retention” of the 8.5 million new customers it acquired last year, with 2 million more added during the second quarter.
- At the quarter’s close, inventory levels were up 7.2 percent for the year.
- For 2021, same-store sales are expected in the range of 18.0 percent and 20.0 percent, up from 8 percent to 11 percent previously. Non-GAAP EBIT margin is expected to be approximately 14 percent compared to 5 percent in FY19. Adjusted EPS is expected in the range of $12.45 to $12.95, up 244 percent versus 2019 and 108 percent versus 2020. Previously, adjusted EPS was expected in the range of $8.00 to $8.70.
The following is a synopsis of analyst views on the quarter and Dick’s outlook.
»Morgan Stanley raised its price target to $145 from $120 and kept its “Overweight” rating on the stock. In a note, Analyst Simeon Gutman, shown right, maintained its “Overweight” rating on the sock because of the firm’s belief that Dick’s is a “faster-growing, structurally more profitable business” post-COVID.
Wrote Gutman, “Our eyes are wide open that current growth and margin levels are unsustainable. But DKS should have a sturdier overall sales base due to scale, key vendor relationships and a top-tier omnichannel platform. This strong positioning, combined with changes to DKS’ promotion strategy, should also make for stickier gross margins.”
The analyst also sees the potential for favorable further upwards revision in the near-term should top-line momentum continue, and that should help continue to support healthy double-digit EBIT margins. Finally, Gutman said the P/E multiple on Dick’s shares at Morgan Stanley’s price target is “well below that of Hardline retail category killers.”
Risks include tough comparisons in the future and an “optical headwind” for the stock as earnings and comps could likely decline against record results. Gutman wrote, “This is no different than what many Hardline/Broadline retailers may encounter given the unprecedented COVID shifts, but it is nonetheless a different recipe than what we are used to.”
»Cowen and Company raised its price target to $179 from $150 and retained its “Outperform” rating. Analyst John Kernan, shown right, said Dick’s scored a “massive earnings beat and a conference call that exuded confidence in the sustainability of gross margin expansion and a business that has structurally improved its omnichannel position and margins.”
The analysts cited Dick’s top-line growth and omnichannel execution as highlights. He wrote, “The recent fundamental shift in consumer behavior—the importance of health and fitness has accelerated, participation in outdoor activities and demand for athletic apparel and lifestyle have grown in tandem with the sophistication of Dick’s omnichannel platform.”
Kernan expects increased private label, improved inventory management and ship from store to support significantly higher operating margins post-pandemic.
Cowen’s proprietary survey data also suggested that Dick’s is gaining sneaker share preference with the aid of improving allocations of product from Nike and Adidas. He wrote, “DKS share preference gain is pronounced in the sporting goods category. Our conversations with management teams at Nike, Adidas, Yeti, Callaway, and Deckers (HOKA) have all been increasingly constructive regarding their relationships with Dick’s Sporting Goods, which we take as a sign Dick’s is scaling beyond its peers across sporting goods.”
»Wells Fargo Securities raised its price target to $140 from $108 previously and kept its “Equal Weight” rating on the stock. Kate Fitzsimons, wrote in a note, “Impressive momentum, but peaking margins and full valuation keeps us on the sides. That said, it’s not lost on us that we are essentially in the best sporting goods environment ever; DKS margins are peaking at 14 percent in 2021 versus the prior peak of 9 percent and DKS will inevitably see some normalization of demand and margins into 2022/23.”
She wrote that while bullish investors are looking to the upside to Dick’s long-term high-single-digit margin target versus the 14 percent this year, “our view is there’s a lot more that needs to go right for DKS into next year,” especially given the current valuation.
»Stifel Financial Corp. raised its price target to $126 from $98 and kept its “Hold” rating. Analyst Jim Duffy, shown right, wrote in a note that first-half revenue growth of 48 percent above the first half of 2019 showed Dick’s is “clearly gaining share across categories.” He further wrote that the implied second half guidance for revenue growth of 17 percent to 21 percent above 2019’s first half “reflects confidence in consumer demand across categories sobered by supply challenges that could limit upside, particularly in 4Q21.”
He cited potential COVID-19-related challenges to the supply chain that continue to impact product availability and could negatively affect the ability to achieve sales upside in FY21. Duffy said that while visibility is challenging beyond year-end, a “likely slowing of fundamentals limits the potential for further multiple expansion keeping us comfortable with the Hold rating.”
»Citi lifted its target price from $128 to $160 and retained its “Buy” rating. Analyst Paul Lejuez said the sales gain of 45 percent versus the second quarter of 2019 ranked as one of the largest in the firm’s second-quarter coverage. The analyst added that although Dick’s strongly raised its outlook, guidance still looks conservative since is assumes a “meaningful deceleration” in the back half. Lejuez further noted that Dick’s team laid out several drivers expected to sustain higher-than-traditional margins exiting the pandemic, including higher vertical brand penetration, lower hunt penetration, more targeted promotions, reduced print ads, rent expense reductions. Wrote Lejuez, “As a result, we believe DKS can sustain a LDD EBIT margin over the long-term. With shares trading at an F22E EV/EBITDA multiple of just 6.5x, we believe the risk/reward is still very favorable.”
»Williams Trading increased its price target to $165 from $140 and maintained its “Buy” rating. Analyst Sam Poser wrote in a note, ” Our confidence is based on improving customer engagement through expanding use of its CRM, best in class BOPIS, and curbside pickup omni-channel features, increasing experiential features in stores, improving positioning & relationships with major brands, sales & margin accretive exclusive brands, a much improved loyalty program, and a supply chain that appears to be able to overcome much of the recent congestion, though visibility into late 4Q21 and into 2022 remains a bit blurry. The supply chain challenges, and the more focused assortments, will, in our view result in EBIT margins rebasing in 2022 over 600bps higher than they were in 2019.”
»UBS raised its price target to $142 from $115 and kept its “Neutral” rating. Analyst Michael Lasser said, “We believe DKS’ 2Q reaffirmed much of its bull case. Consumers clearly remain highly engaged with the sporting goods category.”
Lasser added in a note, “We think that DKS’ strong brand relationships have led to a differentiated assortment, & allowed it to better navigate supply constraints. Importantly, DKS attracted 2mm new customers & is retaining many of the 8.5mm customers it picked up in 2020. Plus, we believe many sports are likely seeing a permanent uptick in participation. We think these factors should yield LT benefits. Also, DKS is making structural improvements to its margin profile through growing PL penetration, refining its promotional strategy, exiting the Hunt business, and growing its eComm margins. As a result, we believe DKS is now operating off of a higher base.”
Nonetheless, Lasser believes some uncertainty remains over how a full return to office will impact demand in the sporting goods category, and the extent to which some categories have seen demand pull forward. He added, “With the stock trading at 16x NTM (next twelve months) PE (vs its 13x 5-yr avg), we believe its risk/reward is currently balanced.”
Photos courtesy Dick’s Sporting Goods, Simeon Gutman, John Kernan, Jim Duffy