Dick’s Sporting Goods Earnings: Rare Setback Highlights Industry Challenges

Dick’s Sporting Goods Stock at a Glance

• Fair Value Estimate: $92.00
• Morningstar Rating: 1 star
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: None

Dick’s Sporting Goods Earnings Update

Dick’s Sporting Goods DKS suffered a second-quarter profit miss and cut its full-year non-GAAP earnings per share guidance to $11.50-$12.30 from $12.90-$13.80. While the firm stressed that consumer demand for its products remains strong, investors viewed the report very negatively, sending its shares down about 24%.

We think investors and analysts had overestimated Dick’s competitive position after three years of strong results, leading to overvaluation. Moreover, even after the sharp decline, Dick’s continues to trade above our fair value estimate of $92 per share, which we do not expect to change materially. While shares may appear inexpensive by traditional valuation metrics, we cannot support a more aggressive valuation, as we believe Dick’s operating margins will decline from the low double digits at present to around 7% over the next decade.

Dick’s reported 1.8% same-store sales growth in the second quarter, just 20 basis points below our forecast. It also held to its guidance for flat to 2% same-store sales growth for the year (on a 52-week basis), which aligns with our model. Indeed, we believe its sales are holding up better than those of other retailers in the current environment due to the persistent popularity of activewear.

However, the company’s 34.4% gross margin missed our estimate by 190 basis points, and its operating expenses were 24.1% of sales—150 basis points above our forecast. Dick’s attributed the weaker gross margin to discounting of outdoor merchandise and high levels of theft, while the higher operating costs resulted from higher compensation expenses and marketing investments to support its new House of Sport stores and other initiatives. Consequently, its 9.7% operating margin was nearly 4 percentage points below our forecast, and management suggested margins would remain under pressure in the second half of the year. While the theft problem should eventually abate, we think Dick’s will need to continue to invest heavily in its stores and marketing.