Dick's Comfortably Beats - Analyst Blog

Dick's Sporting Goods Inc. (DKS), an authentic full-line sporting goods retailer, posted strong third quarter 2010 results, ended October 30, 2010, on the heels of higher sales and improved margins. Quarterly earnings climbed to 22 cents a share from the year-ago level of 16 cents and comfortably outpaced its earnings guidance in the range of 15 to 16 cents. Dick's also surpassed the Zacks Consensus Estimate of 17 cents.

A 5.1% increase in consolidated comparable-store sales (comps) and opening of new stores aided the 9.0% year-over-year increase in total revenue, which climbed to $1,079.0 million. Total revenues beat the Zacks Consensus Estimate of $1,038.0 million.

The comps growth was driven by a 3.8% rise in Dick's Sporting Goods store sales, a 2.4% increase in Golf Galaxy store sales, coupled with an 82.4% growth in e-commerce.

Gross profit came in at $307.1 million, up 15.1% year over year. Gross margin improved 160 basis points to 28.5%. Operating profit dipped 11.3% year over year to $28.2 million, resulting from higher selling, general and administrative expenses and pre-opening expenses.

Financial Aspects

Dick's ended the quarter with cash and cash equivalents of $159.4 million and long-term debt of $145.9 million. The debt-to-capitalization ratio was approximately 10.7%.

Store Update

In the reported quarter, Dick's opened 12 and remodeled 8 Sporting Goods stores, relocated 1 Dick's Sporting Goods store and closed 12 underperforming Golf Galaxy stores, bringing the total to 437 stores in 42 states. Golf Galaxy store count in 29 states came in at 79.

Dick's plans to open 8, relocate 1 and remodel 1 Dick's Sporting Goods stores in the fourth quarter 2010. The company also targets to open 2 Golf Galaxy stores in the upcoming quarter.

In fiscal 2010, the company expects to open 26, relocate 2 and remodel 12 Dick's Sporting Goods stores. Dick's also has plans to open 2 new Golf Galaxy stores, and close 12 underperforming Golf Galaxy stores in 2010.

Guidance

For fourth quarter 2010, Dick's expects earnings per share to be between 69 cents and 71 cents and comps to rise between 3% and 4%. The Zacks Consensus Estimate for the quarter is pegged at 67 cents a share.

For full year 2010, management expects earnings in the range of $1.56 to $1.58 per share, while comps are expected to increase in the range of 4.5% to 5.5%. The Zacks Consensus Estimate for fiscal 2010 earnings stands at $1.48.

Dick's expects to incur capital expenditure of approximately $145 million on a net basis in 2010.

Our Recommendation

Pittsburgh-based Dick's Sporting Goods is a full-line sporting goods retailer offering a broad assortment of brand name sporting goods equipment, apparel and footwear in a specialty store environment.

Dick's remains the dominant player in the industry with significant store expansion and potential share gain opportunities in the U.S. We remain optimistic about the company's competitive position, quality of management and consistency of earnings growth.

However, the sporting goods market is highly competitive in nature and Dick's failure to compete effectively in terms of price, quality or product will hamper its growth potential. The company faces competition from Foot Locker Inc. (FL) and Wal-Mart Stores Inc. (WMT). Moreover, a weak economy will likely continue to weigh on the company's profitability in the long term.

Dick's Sporting Goods currently has a short-term Zacks #3 Rank ('Hold') rating. We maintain our long-term Neutral recommendation on the company.

 
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