Dick’s Sporting Goods (NYSE:DKS) reports its fourth-quarter 2019 results March 10 before the markets open. Including dividends, DKS stock is down 30% year to date.
Shareholders really need some good news. The question is whether they’ll get it.
In the past four quarters, Dick’s has delivered positive earnings surprises of 0.90% (Q4 2018), 6.9% (Q1 2019), 4.1% (Q2 2019), and 36.8% (Q3 2019). That’s an average of 12.2% over the past trailing 12 months.
Coming into March 10’s pre-market fourth-quarter 2019 earnings report, Dick’s looks like it will drop another positive earnings surprise on investors. Regardless of whether it beats or not, I believe investors ought to consider buying Dick’s stock before earnings.
First, let’s get the essential numbers out of the way.
Delivering Beyond Expectations
On the top line, the 20 analysts covering DKS stock expect it to generate $2.57 billion in sales in the fourth quarter, 3.1% higher than a year earlier. The company expects its full-year same-store sales to increase by at least 2.5%, 560 basis points higher than a year earlier. This, despite the fact it’s exiting the hunting business, which has negatively affected that aspect of its business.
On the bottom line, analysts expect it to earn $1.22 a share with low and high estimates of $1.13 and $1.38 a share, respectively. The average EPS estimate suggests earnings will increase by 14% over last year.
Thanks to the momentum it carried into holiday, Dick’s Sporting Goods ought to be able to deliver decent results in the fourth quarter. However, we do know that brick and mortar retailers stumbled in the period from Nov. 1 through Dec. 31, producing little or no growth.
Dick’s delivered same-store sales growth of 6% in Q3 2019 with a 3.3% increase in transactions and a 2.7% increase in sales per transaction. Through the first nine months of the year, same-store sales growth was 3.1%. Given it expects 2.5% to 3% overall comps for all of 2019, investors shouldn’t expect too much growth in the fourth quarter.
Meanwhile, retailers saw overall online sales increase by 18.8% in the two-month holiday shopping season, with apparel up 17% over the same period. In Q3 2019, Dick’s e-commerce business had same-store sales growth of 13%. Ecommerce now accounts for 13% of Dick’s overall business, 100 basis points higher than a year earlier.
If Dick’s does surprise on the upside when it comes to comps, it will be because of its online business.
Opening New Stores
Dick’s finished October with 733 Dick’s Sporting Goods stores and 122 specialty locations, including 95 Golf Galaxy locations, as well as 27 Field & Stream stores, many of which the company is unloading as part of its exit from the hunting business.
In March, it will open two Dick’s stores and two Golf Galaxy locations, finishing the month with six fewer Dick’s stores from the end of Q3 2019, and one additional Golf Galaxy location. In its Q3 conference call, CFO Lee Belitsky mentioned that the retailer’s mall stores performed equally to the non-mall stores, a sign that the so-called death of the mall isn’t hurting its business.
While DKS is excited about the company’s sales momentum, it hasn’t given guidance regarding operating margins in 2020. Currently, they’re running at 5-5.2%. Now that the coronavirus is rearing its ugly head, I would think it won’t be mentioning margin expansion in either its Q4 2019 press release or the conference call.
What’s important heading into fiscal 2020 is that it’s got two excellent concepts doing well across hardlines, apparel, and footwear. Once the coronavirus issue passes, it will be off to the races.
The Bottom Line on DKS Stock
As it continues to reallocate inventory at its stores to reflect the ongoing exit from hunting, inventory levels are moving higher. In the third quarter, they rose 17.1% over a year earlier. Investors want to keep an eye on that number.
Overall, however, I think DKS stock is an excellent value play at the moment with an earnings yield above 10%, significantly higher than its five-year average of 7.6%.
If you can hold for the long run, I’d consider buying a small amount before earnings, and then waiting for the coronavirus to play out before buying some more. If you can get some under $30, in 3-5 years, you’ll be thrilled.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
