Summary
- Dick's Sporting Goods has been implementing a lot of initiatives including exiting hunt category, offering more premium products and reallocating floor spaces for sport products.
- Currently, its valuation is the lowest since 2003.
- Its fair value is estimated to be roughly $50, a 2.5x from its current price.
Dick's Sporting Goods (NYSE:DKS) has been hit hard along with the negative market sentiment. Even after the company reported positive operating results for the full year 2019, its share continued to tank further, losing 65% of the market value year-to-date. With the target of $50 per share, we can take advantage of this overreaction in the stock market to buy in Dick's at the cheap price.
Highest Same Store Sales Growth in 5 years
In the retail business, the most important number is the same store sales growth, measuring the sales growth at existing locations that have been opened at least one year. In the fourth quarter 2019, Dick's achieved a comparable same store sales growth of 5.3%, thanks to the increase in both purchase ticket and transaction volume of all three main categories including apparel, footwear and hardlines. For the full year, the same store sales growth came in at 3.7%, the highest in the past five years. In order to achieve this good operating performance, Dick's management has implemented a lot of business changes and initiatives. The company has improved the in-stock position and had better and effective merchandise presentations, as well as rearranging floor space for growing categories. In addition, it has been rapidly removing its hunt category out of 135 existing stores, and replacing with more relevant products for the general market. The rise in 2019 comparable sales indicated that its strategic action to exit hunt category and focus on the athletes' apparel and footwear is a right move.
Although the comparable sales have increased, Dick's 2019 operating income came in at only $375.6 million, a 30% year-over-year decline. The lower operating income was caused by higher SG&A (Selling, General and administrative expenses), which was mainly attributable to the hunt category restructuring charges, non-cash impairment charges on its corporate aircraft and the reduction in value of its deferred compensation plan.
In the first half 2020, from its initial success, Dick's will continue its plan to exit the hunt category, removing it from around 440 additional stores, leaving in only 12% of its total stores. It also plans to re-conceptualize soccer and golf businesses while accelerating baseball department. The company will focus on enhancing store experience for shoppers, delivering exceptional service and providing more premium products. We believe that by restructuring hunt category and expanding product offerings on premium products to athletes, Dick's can continue to achieve positive comparable store sales in the next two years. In the first half 2020, Dick's might take additional charges on hunt department restructuring of around $100-$120 million, then the operating income will improve gradually in the second half 2020.
