DICK’S Sporting Goods: Any Clear Sign (NYSE: DKS)

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The biggest risk facing the retail sector was a period of lower normalized earnings after a push forward, but DICK’S Sporting Goods (DKS) just provided the clear sign. As others in the retail industry have reported, revenue and profit normalize to much higher levels going forward. My investment thesis goes back to being bullish on the sporting goods retailer

amazing year

DICK’S just reported a year in which revenue jumped 28% and EPS jumped 157% to $15.70 per share. The sporting goods retailer only reported fiscal year 2019 EPS of $6.12 per share.

Again, the company shattered same store guidance with sales up 5.9%, driving EPS above $0.11. DICK’S dominated the difficult compositions which had already increased by 19.3% in FQ4’20 and 5.3% in FQ4’19.

The biggest risk to investing in the current environment at any retailer was the return of those substantial gains during covid. Many consumers purchased outdoor goods and equipment such as bicycles and camping gear to avoid indoor activities in the presence of other people.

DICK’S suggested a pullback will occur in FY22, but the number is at a much higher level than expected. The retailer headed for EPS of $11.70-$13.10 for the year after reporting EPS of $15.70 last year. At the low end, the company talks about the possibility of an EPS decline of nearly $4.00 in FY22.

The big chunk of the forecast is for model sales to drop as much as 4% for FY22. Market expectations are now lowered to where the worst-case scenario of an expected comeback leaves EPS nearly double FY2019 levels and above the current analyst consensus for FY22 at $11.26.

Moving forward

DICK’S is in an incredibly strong financial position with $1.1 billion in net cash and a strong cash flow machine now. The stock only had a market value of $9.5 billion before the earnings report despite talk of forward EPS targets topping $11.

If the company hits the high end of EPS estimates at $13.10 per share, the stock only trades at around 7.6x FY22 EPS targets. February, so investors will quickly start looking to growth targets for FY23 as the year progresses.

Tail
Data by Y-Charts

Current consensus EPS targets do not call for significant earnings growth over initial expectations for FY22, but investors should expect significant increases given significant share buybacks. DICK’S repurchased 6.8 million shares during the fourth quarter of 2021 and 10.8 million shares throughout last year for approximately $1.2 billion.

Another year of similar share buybacks would reduce the number of shares by about 12%. The number of shares is only 98.2 million after adjusting for the 11.3 million shares allocated to the senior convertible bonds. The company can quickly reduce this number of shares with the current share price below the level where DICK’S purchased shares in the previous fiscal year. A share-reducing buyout immediately increases FY23 EPS estimates by 10% and FY22 EPS of $13.10 quickly becomes a FY23 target of $14.41 based only on share buybacks.

Meanwhile, DICK’S has a dividend yield of almost 2% after increasing the dividend payout to $1.95 per year. Shareholders will get a solid payout as the stock languishes around $100.

A small risk still exists that management is overly optimistic about the ability to retain all of the revenue captured over the past two years. A normal business would return the massive increase in revenue that has occurred during this period, but all indications continue to suggest that this will not happen. the worst-case scenario would be a comeback with the company buying back billions of shares at higher stock levels in the process.

DKS income
Data by Y-Charts

Carry

The main takeaway from investors is that retail stocks are now exceptionally cheap and DICK’S Sporting Goods is no exception. Businesses are now much more profitable with e-commerce operations able to avoid losing market share to online retailers.

The stock is exceptionally cheap, with DICK’S trading over $40 off the highs as the company continues to buzz. Investors are expected to buy the shares alongside the company’s massive buyout.

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