Is This Sporting Goods Retailer a Buy After an 11% Daily Drop?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dick’s Sporting Goods (NYSE: DKS) has recently experienced a significant drop of nearly 11% in one trading day, because the company’s earnings results missed analysts’ expectations. The fourth quarter earnings came in at $1.03 per share, lower than Wall Street’s estimate of $1.06 per share. At the current price of more than $45 per share, it is trading around its 52-week low. Is a recent significant drop a buying opportunity for investors? Or should we stay away due to the company’s earnings miss? Let’s find out.

Business snapshot

Dick’s Sporting Goods is an authentic full-line specialty retailer of sporting goods equipment, apparel and footwear, operating 518 Dick’s Sporting Goods stores in 44 states and 81 Golf Galaxy stores in 30 states. The majority of its revenue, around 52% of the total revenue, was generated from hardlines sales, including sporting goods, fitness and golf equipment. Apparel ranked second, accounting for about 29% of the total revenue while footwear contributed around 19% of the total sales. The company has a diverse supplier base, as it purchases merchandise from around 1,200 vendors. Since 2010, Dick’s Sporting Goods has experienced consistent growing same store sales. The company enjoyed a same store sales growth of 7.2% in 2010, 2% in 2011 and 4.3% in 2012.

A cash cow with historical consistent performance

Over the past ten years, Dick’s Sporting Goods’ revenue, net income and cash flow have been on the rise. The revenue has grown from $1.47 billion in 2003 to nearly $5.84 billion in 2012, while the net income has risen from $86 million to $290.7 million during the same period. It only experienced a loss of $35 million in 2008, due to $164.25 million impairment charges of goodwill and intangibles. What interests me is the fact that Dick’s Sporting Goods’ seems to be a great cash-generating machine. Its operating cash flow has increased from $87 million to $438.3 million for the past ten years, whereas the free cash flow has surged from $32 million to $219 million in the same period.

Little leverage employed in the business

In the retailing business, a retailer might miss quarterly earnings results or miss a short-term fashion trend. However, it’s critical for retailers to have a strong balance sheet to weather the short-term headwinds. Dick’s Sporting Goods has a quite conservative capital structure. As of February, the company had $1.59 billion in total stockholders’ equity, $345.2 million in cash and only $16 million in long-term debt and leasing obligations. In the past twelve months, Dick’s Sporting Goods have spent nearly $200 million to repurchase shares. The company also announced another share buyback program of as much as $1 billion.

The dominating player with the most expensive valuation

At the current trading price of around $45 per share, Dick’s Sporting Goods is worth about $5.6 billion on the market. The market values the company at 9.6 times EV/EBITDA. Compared to its peers including Foot Locker (NYSE: FL) and Finish Line (NASDAQ: FINL), Dick’s Sporting Goods seems to have the most expensive valuation. Foot Locker, at a current trading price of around $33 per share, has the total market cap of more than $5 billion. It is valued at only 5.72 times EV/EBITDA, a much cheaper valuation. The smallest company among the three is Finish Line. It is trading at nearly $19 per share, with a total market cap of more than $920 million. It is also valued the cheapest, at 4.85 times EV/EBITDA. The highest valuation of Dick’s Sporting Goods might be due to its fast growth earnings. In addition, it is the dominating player, with a 8.5% market share in the U.S. sporting-goods market, while Foot Locker owns around 6% market share.

Among the three, Foot Locker generated the highest operating margin at more than 10%, while the operating margins of Dick’s Sporting Goods and Finish line were 8.8% and 8.63%, respectively. Dick’s Sporting Goods pays to existing shareholders the lowest dividend yield at 1.1% while the dividend yield of Foot Lock is the highest, at 2.2%, and Finish Line pays 1.4% dividend yield.

My Foolish take

Even after a daily significantly drop of nearly 11%, Dick’s Sporting Goods does not seem to be cheap. I personally think it is still relatively overvalued compared to its peers. I would rather wait for a much cheaper price before initiating a long position in this stock. 


Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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