Does Dicks Sporting Goods (DKS) Have Much Farther to Run?

DKS Has Soared Since Mid-2022 Leaving Some to Wonder if the Stock has Gone “Too Far, Too Fast”

• Since mid-2022, DKS shares have soared over 190% more than three times the return of the S&P 500.
• DKS success has been driven primarily by superb execution.
• The company has posted positive same store sales growth in each of the last eight quarters.
• In contrast, its main sporting goods retailing competitor Academy Sports and Outdoors, Inc. (ASO) experienced negative growth in each period.
• DKS generates substantial free cash flow, about $750 million over its most recently reported 12 months. It has used much of that excess cash to repurchase its own stock.

“Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”
-Peter Lynch

Summary Buy Thesis:

• DKS’ has succeeded despite the onslaught from online retailers like Amazon and at the same time similar big box competitors have stumbled badly – a testament to the firm’s operating acumen.
• The stock shows up as a top pick in our Large Cap Value, Growth, and Dividend & Income Models.
• We love stocks like these – they tend to be too “growthy” for value managers and too “value” for the growth crowd – leaving them without fierce advocates from either side despite the stock being in both the Russell 1000 Growth and Value Indices.
• Despite the stock’s soaring returns, the fundamentals and valuations remain robust. Consider:

– At only 15x earnings DKS is cheaper than 85% of the stocks in KCR’s Large Cap Universe

– With 10% of the market cap in cash and cash from operations of ~$1.5bn, the company has tremendous flexibility and its balance sheet ranks in the top 20% of our Large Cap Universe

– With a return on equity of nearly 40% and solid accruals score, the company’s Earnings Quality ranks in the top third of all stocks in our Large Cap Universe

– We see analysts being surprised, moving estimates higher and the stock being in the top quartile of our Analyst Estimates rank

– And with the strong and consistent price action, our Market Quality ranking is near the top decile

• Many investors think much of DKS’ goods are discretionary – it is our admittedly anecdotal experience that parents are willing to delay many other purchases before failing to equip their kids for athletics.

Risks:

• DKS’ strong sales performance over the last eight quarters has been accomplished against the backdrop of a strong economy and solid job growth. It is an open question whether a strong sales pace can be maintained if the U.S. economy slows or enters a recession.

Over the next 5 pages we will do our best to articulate the bullish view on DKS.

Company Description

DICK’S Sporting Goods, Inc. (DKS) is the largest sporting goods retailer in the United States. It operates 725 DICK’S Sporting Goods locations across the U.S., as well as 136 specialty concept stores such as Golf Galaxy and Public Lands.[1] According to Circana, a data analysis firm which tracks consumers’ buying habits, as well as DKS proprietary data, DKS holds about an 8.5% market share in the $140 billion total U.S. sporting goods market for hardlines, apparel, and footwear. DKS believes it has gained 50 basis points of market share since 2022. [2]

A key aspect of DKS’ strategy is providing its customers unique in-store experiences, including batting cages, rock walls, and golf simulators. The company believes — and its results have borne this out — these experiences have created significant customer loyalty.

Extensions of this strategy are DKS’ initiatives to open giant DICK’s House of Sport (~120,000 square feet per location) and DICK’S Field House (~50,000 square feet per location) stores, which include even more unusual features for customers. Eleven such stores were open at year end 2023, and the company plans to open 15 more in 2024, six of which already are welcoming customers. [3]

DKS’ sales are spread fairly evenly across hardlines (such as sporting goods, fitness and golf equipment), apparel, and footwear, with hardlines being the largest category at 38% of sales. The table below details the DKS sales breakdown, as well as similar details for peer companies such as Academy Sports and Outdoors, Inc. (NASDAQ: ASO), a broad-based sporting goods and outdoor recreational retailer; Foot Locker, Inc. (NYSE: FL), a global footwear and apparel retailer; and Big 5 Sporting Goods Corporation (NASDAQ: BGFV), a struggling sporting goods retailer.

Breakdown of FY 2023 Revenues for DICK’S Sporting Goods, Inc. and Selected Competitors

Sources: 2023 10-K’s for DICK’S Sporting Goods, Inc., Academy Sports and Outdoors, Inc., Foot Locker, Inc., and Big 5 Sporting Goods Corporation.

DKS Has Posted Impressive Relative & Absolute Results for the Last Nine Consecutive Quarters

The table below show the comparable store sales changes of DKS over the last nine quarters, as well as those figures for ASO, its principal broad-based competitor in the sporting goods space, and for FL. BGFV does not release comp store sales information.

Comparable Store Year-Over-Year Sales Changes Over the Last Nine Quarters

DKS’ comp stores have been positive each of the last eight quarters, while ASO’s have been negative. Remarkably, DKS’s quarterly comp store sales growth has exceeded ASO’s by an average of 10.3% over this period. Parenthetically, DKS’ starkly outperforming ASO explains its significant market share gain since 2022.

It would not be an exaggeration to think that a casual observer of this huge difference in performance could conclude that DKS is operating in a far different economy than ASO, FL, or BGFV. Note the vastly different overview comments each company’s CEO made regarding the most recently reported quarter:

• DICK’s Sporting Goods, Inc.: “We delivered a very strong second quarter. …. Our Q2 comps were driven by growth in average ticket and transactions.” DKS’ CEO Lauren Hobart had previously noted that the company saw 1Q FY 2024 sales growth across all income demographics and detected no signs of trading down. [4]
• Academy Sports and Outdoors, Inc.: “Sales for the second quarter were more challenging than expected, impacted by a tough economy, a temporary distribution center backlog related to going live with a new warehouse management system and by a very active storm season across key portions of our footprint.”
• Big 5 Sporting Goods Corporation: “Our second quarter results were consistent with our guidance range, as our customers continue to feel the ongoing and cumulative impact of inflationary pressures on their discretionary spending.”

We would note that if the macroeconomic read-through by ASO and BGFV are accurate, then the execution by Dick’s is nothing short of extraordinary. But in our view – either DKS has executed marvelously or ASO and BGFV are making excuses.

Note: ASO is 512 ranked in our Small & Midcap Model vs. DKS being the 8^th highest ranked stock in our Large Cap Universe.

DKS Reported Solid 2Q FY 2024 Results

Bolstered by these strong sales, DKS’ revenue for the twelve months ended August 3, 2024, reached $13.4 billion, up 6.3% from the twelve months ended July 29, 2023. Comparable store sales increased as well over the most recently reported twelve months (+3.5%), but at a slower pace. [5]

DKS’ gross margin was 35.6% over the last twelve months, higher than those of its competitors. Clearly, this is a positive for DKS, but whether this margin can be maintained is an open question.

DICK’S Sporting Goods – Recent Summary Financial and Operating Results

DKS’ adjusted EPS for the twelve months ended August 3, 2024, was $14.35, up from $12.91 in FY 2023, and $12.04 in FY 2022. Interestingly, DKS management has issued full-year FY 2024 EPS guidance of $13.55 to $13.90, which represents a notable downtick from the most recent twelve months figure.

Two factors explain this seeming abnormality:

1) back-to-school sales with a gross margin of about $105 million were shifted into the already-reported 2Q FY 2024 from 3Q FY 2024 because of a change in the end date for 2Q this year (August 3^rd) versus last year (July 29^th); and

2) the fourth quarter of FY 2023 (ended February 3, 2024) was a 14-week quarter while 4Q FY 2024 will be only 13 weeks. An additional week of sales in the fourth quarter equates to around $170 million of revenue. [6]

DKS generated $749 million of free cash flow in the twelve months ended August 3, 2024, about in line with the average of its excess cash flow in FY 2023 ($940 million) and FY 2022 ($558 million). We define free cash flow as operating cash flow minus capital expenditures.

Can DKS Maintain its Current Elevated Gross Margin Level?

Perhaps the key element in DKS’ explosive earnings growth over the last few years has been its sharp gross margin expansion. Indeed, after remaining quite consistent at about 30% from FY 2014 through FY 2019, gross margins have jumped to 31.8% in FY 2020, an apparent peak of 38.3% in FY 2021, 34.6% in FY 2022, and 34.9% in FY 2023.

DICK’S Sporting Goods, Inc.’s Gross Margins Have Jumped from FY 2014 – FY 2019 Levels

A slide in DKS’ 2Q 2024 investor presentation illustrates a possible concern. DKS has been able to raise its gross margin 255 basis points over four years by raising prices to its consumers at a faster rate than its suppliers hiked their prices to DKS. Such a strategy has a much better chance to succeed in the strong jobs/strong wage growth environment that prevailed in the U.S. for much of the last few years. However, maintaining such margins could be tougher in a looser labor market.

DICK’S Sporting Goods, Inc. — Sources of Gross Margin Improvements from FY 2019 to FY 2023

Source: DICK’S Sporting Goods, Inc. Investor Presentation, September 2024.

Investment Summary

DKS stock has been a stellar performer over the last two years. Since mid-2022, DKS has risen over 190%, more than three times the return of the S&P 500. Furthermore, DKS shares rose in a nearly straight-line fashion from mid-2022 through March 2024, though it has been essentially flat since then.

DKS has executed in nearly flawless fashion. Its record of posting positive same store sales growth in each of the last eight quarters, while its main sporting goods retailing competitor ASO experienced negative growth in each period is an extraordinary achievement, in our view. Clearly, DKS is marketing its products very effectively and has inspired loyalty among its customers.

DKS generates substantial free cash flow, about $750 million over its most recently reported twelve months. Moreover, the company is shareholder-friendly and utilizes ~70% of that cash to repurchase its own stock.

Despite the strong stock price performance since 2022, the data tells us the company’s valuation is cheap, their balance sheet robust, their earnings quality solid, the analyst community pivoting to support the company, and the price action all suggest the stock’s best days might be ahead of it.

KCR would also note that some critics have suggested the strong returns of DKS have been due to the massive Covid stimulus checks (which appear to be running out). While there is no denying this may have helped Dick’s and could become a headwind, as this note explains, DKS’ competitors found no relief from these stimulus payments. In our view this suggests Dicks managed to both fend-off online retailers while taking share from other box stores.

Risks: DKS’ strong sales performance over the last eight quarters has been accomplished against the backdrop of a strong economy and solid job growth. It is an open question whether a strong sales pace can be maintained should the U.S. economy slow and/or enter a recession.