Sports retailer Dicks Sporting Goods Inc (NYSE:DKS) reported its first-quarter results today, and “disappointment” would seem a gross understatement. Earnings met analyst expectations, sure, but same-store sales growth fell well short of Wall Street estimates and the company’s internal guidance — a running theme among retails for Q1 results. As a result, DKS stock is off big — some 14% in Tuesday’s premarket trade.
I’m obviously not emboldened by the weak comps, nor the full-year guidance for same-store sales, but I still believe Dicks is a tremendous “buy the dip” opportunity for investors wanting to get in low on a long-term winner.
Here’s why.
Dicks Sporting Goods Has More Than Q1 Showed
Same-store sales matter, so it makes sense that Dicks shares are lower after the company reported a mere 2.4% rise in comps. Wall Street was looking for a 3.6% gain, and management had expected a rise between 3% and 4%.
Going forward, management expects comp growth to slow to 1% to 3%. The Street was looking a 2.7% gain.
If comps growth comes in at up 2% this year, that would be a noticeable slowdown from the 3.5% mark achieved last year. Clearly, same-store sales momentum is slowing.
But it’s still positive. And if you look around at what the rest of retail is doing, you’d understand just how important that is.
Moreover, DKS still expects to earn $3.70 in adjusted earnings per share this year — up roughly 20% year-over-year. Cash is up 17% year-over-year against hardly any debt, and cash flow improved significantly YOY.
Think about it this way: Name other retailers posting positive comps, expecting nearly 20% EPS growth this year, growing cash by 17% and posting improvements in cash flow … all while trading at 11 times this year’s expected earnings.
Bottom Line on DKS Stock
Retail is consolidating, and there will be a lot of pain in that process.
But the last guys standing in each niche will be massive winners, and Dicks — in the sporting goods game — has a niche. Other sports retailers have been falling one by one. Sports Authority, Eastern Mountain Sports, Sports Chalet, City Sports, Gander Mountain, Golfsmith, and Total Hockey have all gone under.
That market share isn’t just going to the Amazon.com, Inc. (NASDAQ:AMZN) boogeyman. It’s going to Dicks and the few remaining brick-and-mortar players.
This massive consolidation and subsequent market share hoovering is why comps will remain positive over the next several years. It’s why earnings will continue to grow at a mid-teens annual rate over the next several years. And it’s why DKS stock is woefully undervalued at 11 times this year’s earnings.
Retail is awful right now, there’s no denying it. Home Depot Inc (NYSE:HD) has managed to impress Wall Street analysts, and really, there are few others.
But if you look through Q1’s noise, there is a tremendous opportunity to buy long-term winners at depressed prices. Thanks to accelerated consolidation in the sports retail world, DKS stock is one of those long-term winners.
As of this article, Luke Lango was long HD and DKS.
