(By Mani) Dick's Sporting Goods, Inc. (NYSE:DKS
) is one of the best growth stories in hardlines, at a valuation that doesn't reflect its true potential, driven by new store growth, product innovation, increasing new store productivity and visible margin drivers.
Dick's Sporting Goods is the second largest specialty sporting goods retailer in the U.S. with year-end 2011 revenues of $4.87 billion. Dick's footprint has continued its westward expansion as it recently entered California in a meaningful way through its Chick's acquisition. As of April 28, 2012, it operated 486 Dick's Sporting Goods stores in 44 states and 81 Golf Galaxy stores in 30 states.
For the first quarter, the company's profit increased to $57.16 million or 45 cents a share from $37.5 million or 30 cents per share in the previous year. Analysts, on average, polled by Thomson Reuters expected the company to earn 38 cents a share in the quarter.
Net sales for the quarter grew 15.1 percent to $1.28 billion, which also topped analysts' estimate of $1.23 billion. Consolidated same-store sales, a key measure of retailer performance, rose 8.4 percent during the quarter.
Dick's is an authentic sporting goods retailer offering products for a wide variety of athletic endeavors and attempting to cater to the sports enthusiast, from beginners to advanced athletes.
"Key investment positives including top line and margin growth enhancers, including an improving e-commerce business," Deutsche Bank analyst Mike Baker wrote in a note to clients.
The company is not seeing any slowdown in product innovation as vendors continue to add technology to products. As such, the pipeline to continue to drive sales, generally at higher price points, remains strong.
Dick's ended last quarter with 118 Nike Fieldhouses and 56 Under Armour store within its store programs and will add another 100+ this year between the two vendors, plus about a dozen store within a store set ups with The North Face.
"About 20%-30% of the products in these store-within-a-store set ups are exclusive to Dicks and those products carry higher price points and margins. As DKS continues to roll this out therefore, store sales and profitability benefit," Baker noted.
The company also uses its strong vendor relationships to set its ecommerce business apart from competition as Baker's recent analysis shows that about half of Dick's best selling on line products from big brands such as Nike, Inc. (NYSE:NKE) and Under Armour, Inc. (NYSE:UA) aren't available at Amazon, Inc. (NASDAQ:AMZN).
Though, certain products are available on Amazon through diverters, but not in the same depth of color and size choices as Dick's, thereby positioning the company well against this type of on line competition.
The company would benefit from new store productivity as it is expanding in California, Florida and Texas. Dick's has just 11 percent of its stores in these states that have 26 percent of the U.S. population. The company expects to open about 40 new Dick's Sporting Goods stores and relocate five Dick's Sporting Goods stores in 2012.
Although the company is under-penetrated in these areas, 35 percent of its new stores over time will come in these better markets, which should continue to contribute to above average new store productivity and increase in overall sales per foot.
On the margins front, Dick's ended the first quarter at 8.6 percent operating margins, which is expected to grow 11 percent by 2015, with most of the gain coming from gross margins.
Gross margin would benefit from mix, leverage on occupancy, systems benefits and increased private label, which combined will add 200 basis points.
"We see a path to double digit margins in the next three years, and in fact can get to 11% with most of the gains coming on the gross margin side, where we can quantify 200 bps of benefit. Add in some leverage on annual comps of 4%, and margins go to. This would drive long term earnings power of $4.33 by 2015," Baker added.
For the second quarter, the company expects earnings of about 62 cents to 63 cents a share, with same-store sales expected to increase around 2 to 3 percent, compared to a 2.5 percent increase in the second quarter of 2011. Analysts expect the company to earn 64 cents a share for the quarter.
For the full fiscal year, Dick's Sporting sees earnings of about $2.45 to $2.48 per share. Analysts currently looking for earnings of $2.51 a share for the year. Consolidated same-store sales are predicted to increase about 3 to 4 percent, compared to a 2 percent increase in fiscal 2011.
Out of the 29 analysts covering the stock, 18 rate it as "strong buy/buy," while the rest 11 recommends "hold." There were no "sell' rating on the stock, which has a mean price target of $56.83. They have been trading between $29.10 and $51.65 in the past 52-weeks.
On the valuation front, shares of Dick's currently trades at 16 times consensus 2013 EPS estimate, which is a discount to analyst's base case earnings growth rate of 18 percent. Baker has a price target of $56, which is 19.5 times the 2013 estimate.
"While the 19x multiple is a premium to our group average target multiple of 13x - 14x given a higher growth rate, our 110% PEG is in line with the 5-year hardline average," the analyst added.