Dicks Sporting Goods Inc (DKS) stock has had a rough go of it over the last year, with shares off more than 23% in that time. Investors clearly aren’t happy with those results, especially considering the S&P 500 is off just 4.6% over the same period.
But after this morning’s first-quarter 2016 earnings announcement, I think it’s becoming clear to Wall Street that DKS stock is actually a pretty remarkable value play at these levels. Shares of the sporting goods retailer are up about 9% in late morning trading.
The truth of the matter is it wasn’t first-quarter earnings — and it definitely wasn’t guidance — that sparked this realization.
DKS Stock: How Does Weaker Guidance = Buy?
You might scratch your head when looking at the numbers Dick’s just reported, taking a look at the guidance management just announced, and then peeking at DKS stock, which is as I previously mentioned, soaring.
After all, the first quarter was nice, but relatively unremarkable. Revenue advanced 6.1% from Q1 2015 to $1.66 billion, in-line with estimates. Adjusted earnings per share was 50 cents, a penny better than Wall Street estimates but down 3 cents from the year-ago period.
On top of that, Dick’s lowered expectations for FY 2016, and pretty significantly. Management now sees EPS between $2.60 and $2.90, which at the midpoint implies a decline from the $2.87 per share Dick’s made last fiscal year.
So why is DKS stock jumping? And why is it such a value play right here?
Well, the lowered guidance is due to “expected liquidation activity in the market”, which basically just means The Sports Authority will be having going-out-of business sales that’ll pull some customers away. In the near-term.
Longer-term, the dynamics simply look more attractive for DKS stock owners. Dick’s CEO Edward W. Stack made some comments in the earnings release that investors are taking to heart, as they should:
“The consolidation that is occurring among sporting goods retailers is creating a unique time in the industry…Over the longer term, we remain confident in our ability to aggressively capture displaced market share and to strengthen our leadership position.”
I do too. When industries consolidate, there tend to be big winners and big losers. Dick’s will undoubtedly be a big winner, and with DKS gearing up to bid on as many as 180 Sports Authority locations, Dick’s can dramatically increase its footprint overnight. Currently the company operates 647 Dick’s stores; another 180 locations would boost its store count by 27.8% overnight.
At less than 12 times forward earnings, DKS stock is priced like it’s going out of business itself. But earnings are actually expected to jump 17.6% next fiscal year, after all this “liquidation activity” is over and done with and Dick’s is enjoying the spoils of its expanded market share.
Can we expect Dick’s to grow by leaps and bounds from here on out? No. Pressures from Amazon.com, Inc. (AMZN) are certainly a concern, and one of the lessons from this earnings season is that traditional mall retailers are slowly dying out.
However, I don’t think brick-and-mortar sporting good is going away. Plus, Dick’s is getting better at e-commerce, albeit slowly: Online sales accounted for 9.2% of revenue last quarter, up from 8.5% a year ago.
DKS stock owners can also breathe easy knowing the company approved $100 million to $200 million in share buybacks, and there’s a healthy 1.5% dividend yield to boot. If investors can be patient, and wait for the long-term picture to play out, I have a feeling they’ll be amply rewarded.
As of this writing, John Divine was long AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
