Dick’s Sporting Goods Earnings: Solid Start to 2023, but Consumer Spending and Costs Are Concerns

Matching our estimate for 5% sales growth, Dick’s Sporting Goods’ DKS first-quarter results generally aligned with our expectations. As the firm reiterated its full-year guidance for EPS of $12.90-$13.80 on flat to 2% comparable sales growth, we expect to make minimal revisions to our respective estimates of $13.54 and 1%. Overall, we believe Dick’s is executing well in an industry that has been struggling with elevated inventories and slowing consumer spending on athletic apparel and footwear. Thus, we expect to lift our $89 fair value estimate by a low-single-digit percentage. Although we believe its valuation is stretched and view it as a no-moat retailer due to the competitiveness of its space, we also think Dick’s has strengths, including its relationship with key vendors like wide-moat Nike, its loyalty program, and its prominence in youth sports.

Dick’s first-quarter margin performance was mixed. Solid sales allowed the company to post a strong 36.2% gross margin (120 basis above our forecast) despite discounting by others. However, its 11.5% operating margin fell 50 basis points short of our estimate as operating expenses came in at 24.4% of sales, its highest result for any quarter since 2020. Dick’s attributed its higher expenses to compensation, store, marketing, and other investments that it believes will bolster its competitiveness in the long run. While we see some value in these plans, we do not believe Dick’s can hold its current 11%-12% operating margins for the long term (we forecast they will drop below 10% in the latter part of this decade). Therefore, we would prefer to see more cost control.

Dick’s $3.40 in first-quarter EPS eclipsed our estimate by $0.10, but this outperformance was attributable to an unusually low 7% tax rate on the timing of employee equity awards. Given the operating margin shortfall, EPS would have missed our estimate by about $0.25 if the tax rate had matched our 16% forecast.