Dick’s Sporting Goods Heading in Right Direction
The retailer's execution and investment spending is properly directed as it faces continued headwinds.
Dick's (DKS) fourth-quarter results continue to show that the firm is taking steps to withstand a plethora of headwinds, including a heightened promotional landscape, wage pressures, and the need for increased investments behind its omnichannel build-out. While these factors are constraining profits, the impact was in line with our expectations, as adjusted operating margins fell 170 basis points to 7.4%, placing its full year at 5.9% versus our 5.8% forecast. Similarly, its fiscal 2018 guidance implies adjusted operating margins of around 4.7% (with management guiding to modest gross margin pressure without quantifying), which aligns with our 4.7% estimate. As such, we don’t plan to materially change our $36.50 fair value estimate (based on 2.3% average top-line growth and 5.7% operating margins over the next decade) and believe the share price offers patient investors a margin of safety following the low-single-digit decline in response to results.
While we don’t anticipate these headwinds to subside, we see a few levers to support its traffic/transactions, margin profile, and better utilize its stores over the next decade. For one, Dick’s continues to build out its own ecommerce platform, which appeals to consumers’ desire to shop online and 2) diversifies it’s business beyond the promotional North American wholesale market (source of the promotional headwinds that we expect to rationalize in the second half of 2018). In this vein, e-commerce sales were up 9% (14% excluding a holiday integration issue) and now account for 13% of total sales. We expect this channel will grow at a double-digit clip (toward 30% of sales) through fiscal 2027 and should support the firm’s transactions (which were flat this quarter but lapped a strong 2.5% increase last year). As such, we believe the firm’s execution and investment spending is properly directed, and view management’s decision to allocate savings from U.S. tax reform to support this channel favorably.
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John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.