Dick’s Sporting Goods (NYSE:DKS) stock popped in late August to its highest levels since 2016 after the sporting goods retailer reported impressively strong second quarter results that blew past expectations.
In the quarter – the same quarter wherein consumer spending rose just 3.5% – Dick’s reported 20%-plus revenue growth and 20%-plus comparable sales growth, paced by nearly 200% growth in e-commerce sales.
Talk about impressive.
The show of strength from Dick’s in an otherwise turbulent and tough time for legacy physical retailers inspired confidence into investors, who pushed DKS stock up by more than 15%.
What comes next?
Sustained strength in DKS stock to the $60 level.
Strong Earnings
Dick’s Sporting Goods’ earnings report for the second quarter was very good.
In numbers, comparable sales rose 20.7%. Net sales rose 20.1%. E-commerce sales rose 194%. Gross margins expanded by more than 450 basis points. The opex rate leveraged by 300 basis points. Operating margins more than doubled year-over-year. Earnings per share rose nearly 250%.
Underneath the hood, a few things powered these strong results.
First, athletic apparel demand clearly remains vigorous, and after not shopping for athletic apparel and goods in the first quarter of 2020, there was ample pent-up consumer demand for the things which Dick’s sells. That pent-up demand was unleashed in the second quarter of 2020 as Covid-19 mobility restrictions eased.
Second, Dick’s figured out how to optimize its omni-channel presence at a time when its stores were closed and/or operating at reduced capacity. Specifically, the company’s Curbside Contactless Pickup and Buy-Online, Pickup-in-Store (BOPIS) initiatives were huge sales drives in the quarter.
Third, with everyone staying at home, dress has become more casual. As opposed to wearing dress shirts and ties every day, we now wear athletic shorts and tees.
Fourth, with gyms closed, demand for at-home fitness equipment has also soared. Dick’s is one of the nation’s top sellers of at-home fitness equipment.
Meanwhile, gross margins expanded significantly because of strong demand against a backdrop of constrained supply (which led to very few markdowns), and all the operating leverage was driven by the company’s ability to sell a ton of product without operating its stores at full capacity.
Overall, really solid quarter from Dick’s, and the pop in DKS stock makes complete sense.
Enduring Tailwinds
Some of the tailwinds Dick’s benefited from in Q2 won’t persist. But most of them will, implying a bright future for DKS stock.
While pent-up consumer demand for athletic apparel will ease and eventually disappear, strong demand will persist. That’s because consumers are increasingly choosing to wear athletic apparel in more and more everyday situations, in a “comfort over style” movement that isn’t going anywhere anytime soon.
The e-commerce business will obviously cool down as Covid-19 fears abate. Still, the pandemic has forced Dick’s to get better at omni-channel, and with a more robust omni-channel platform today, the company is better positioned to meet the dynamic needs of modern consumers.
Gyms won’t remain closed forever. But there is a portion of the population that has discovered they like working out at home (for free), as opposed to paying to go to a gym. This portion of the population will sustain elevated demand for at-home fitness equipment for the foreseeable future, as they upgrade existing equipment and buy new things to “build out” their home gyms.
Gross margins won’t remain this elevated forever, mostly because demand and supply constraints will both ease. Still, a more favorable supply-demand backdrop does imply that gross margins will remain above pre-Covid levels going forward. So does the fact that Dick’s is now selling more through Curbside Pickup and BOPIS, two online sales channels which carry higher margins than shipping orders because of lower fulfillment expenses.
Overall, then, Dick’s in Q2 is not what the company will look like going forward – but it does imply that the future is brighter than the past for this sporting goods retailer.
Discounted Valuation
DKS stock remains discounted relative to the company’s long-term growth potential.
The company should be able to turn strong athletic apparel demand and its built-out omni-channel platform to drive steady 2% to 3% sales growth over the next few years. Gross margins should stabilize around the 30% range. Opex rates should remain similarly stable.
Assuming so, then my modeling straightforwardly suggests that Dick’s is on track to do about $5.30 in earnings per share by 2025.
Based on a 16x forward multiple and an 8.5% annual discount rate, that implies a 2020 price target for DKS stock of over $60.
Bottom Line on DKS Stock
Dick’s Sporting Goods showed the world in Q2 that the company is taking lemons (the Covid-19 tragedy) and making lemonade (the company has turned into a more formidable retailer with broader omni-channel operations and higher margins).
Favorable growth trends at Dick’s will persist for at least the next few years.
As they do, DKS stock will continue to move higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
