Dick’s Sporting Goods’ Solid Q1 Overshadowed by Cautious Outlook; Shares Fairly Valued
The no-moat firm offered mixed messages about the rest of the year.
Dick’s Sporting Goods opened 2022 with first-quarter results above our expectations, but the firm offered mixed messages about the rest of the year. It now anticipates 2022 adjusted EPS of $9.15-$11.70, short of our $12.77 forecast, on a comparable sales decline of 2%-8%. However, it stressed that this outlook anticipates inflation-related demand weakness that has yet to occur. This cautious view caused a big swing in the company’s shares—after initially dropping about 10%, they reversed to a nearly 10% gain. Although it now appears likely to fall short of initial 2022 expectations, we do not expect to make any significant change to our $75 fair value estimate and view Dick’s shares as fully valued. We have long anticipated declining operating margins and sales growth rates in our model as we view Dick’s as a no-moat retailer in a very tough space, though it has made nice progress with its merchandising and omnichannel efforts.
Against a difficult comparison, Dick’s recorded an 8.4% same-store sales decline, better than our negative 10% estimate. Despite the drop, sales increased 41% over 2019′s first quarter, which the firm attributes to its merchandising and omnichannel efforts and a shift in consumer behavior toward athletic activities during the pandemic. Although we agree that activewear demand remains high, we are less certain that some activities, like running and golf, will hold recent gains.
Dick’s quarterly gross and operating margins of 36.5% and 13.6%, respectively, outperformed our 35.5% and 12% estimates despite high transportation and labor costs. Of some concern, its inventories rose 40% from last year. While this is understandable given last year’s lean inventories and the industry’s shipping woes, such a large increase could lead to markdowns and lower margins than we expect. Thus far, Dick’s seems confident that it can avoid large discounts and even raise prices strategically to offset expenses, reasonable assertions unless consumer spending falls.
David Swartz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.