DICK’S Sporting Goods, Inc. $DKS

My Investment Checklist

1.      Is the company undervalued?

EV/EBIT: 4.48

EV/Sales: 0.75

Price/Book: 3.22

$DKS trades at a comically low valuation.  However the company is coming off peak earnings, which are anticipated to drop meaningfully in the next year.  Even still the valuation doesn’t make much sense, as earnings can get cut in half and $DKS would still be trading for less than 9X EBIT.  Moreover DICK’S has been able to grow at an above market rate over the last decade.   On top of this management is returning a healthy amount of capital back to shareholders, which makes $DKS an extremely compelling investment prospect.

2.      Can I easily explain what the company does?

Yes, they are the largest sporting goods retailer in the US.  They sell primarily footwear, apparel, and sports equipment. 

3.      Does the cash flow statement line up with income statement?

Yes, cashflows have been higher than reported earnings:

Most of their excess cash went towards share repurchases, paying out dividends, building up inventories, and capital expenditures.  The only question mark here are the elevated inventory levels, which make sense as sales exploded and management stated they would actually prefer to have more inventory in stock.

              It’s interesting to note however that $DKS issued $1.5B of debt back in January.  This strikes as a bit odd, given their FCF more than covers any debt servicing or capital expenditure requirements.  I ain’t mad it tho as they’re only paying a 3.15% coupon on 2032 notes and a 4.15% coupon on 2052 notes.  With the 10-year now at ~3% $DKS shareholders should be kissing the ground on which the CFO walks.

4.      Is the Balance Sheet Healthy?

Total Cash: $2.64B

Total Debt: $4.51B

Current Ratio: 1.88

At first glance DICK’S does appear to hold some debt, although ~$2.1B of which is in operating leases.  IMO this shouldn’t be counted as debt, the same way I wouldn’t consider the next 5 years of electricity bills to be a long-term liability.  For this reason $DKS is actually sitting on net cash position and therefore their balance sheet is extremely strong.  As a side note I’m including operating leases in the Enterprise Value calculation, which is probably too conservative if I’m being honest.      

5.      How profitable is the business?

Gross Margins: 38.33%

Operating Margins: 16.55%

Net Margins: 12.36%

As mentioned previously $DKS is overearning and the trailing data is painting an unreasonable optimistic picture.  Here’s what they’ve done over the last decade:

The interesting wrinkle here is that management is claiming they have a “structurally improved margin profile” and think EBIT margins will normalize around 12.5%.  They cite a differentiated product assortment and improved marketing as the reason for higher margins moving forward.

              I’m gonna go ahead and call bullshit on this, there’s nothing differentiated about their Nike shoes or the Callaway golf clubs they sell.  It’s almost insulting that management thinks investors are dumb enough to buy that load of crap!  In fairness $DKS does have their own higher margin private label merchandise.  With that said, I can assure you no one is going into Dick’s chomping at the bit to buy DSG or CALIA apparel (you probably didn’t even know those brands existed).  At the end of the day $DKS is a glorified middle man and will always be a low margin business.

6.      What is the company’s growth potential?

10-yr Revenue CAGR: 9%

10-yr Operating Income CAGR: 14.53%

10-yr FCF CAGR: 19.58%

It’s important to note that the ending date used here (2021) is fudging the data.  Notwithstanding these numbers are pretty impressive, especially when you consider that almost all of this growth has come organically.  Conversely future growth will almost certainly be lower as $DKS retail footprint is nearing full saturation.  For example they’re only expected to increase their store count by ~1.5% in 2022. 

              Additionally there appears to be some weakness in e-commerce, which actually decreased by 11% in 2021.  2020 was for sure a tough comp, but there are plenty of omni channel retailers who were able to grow ecommerce sales in 2021 (I own Macy’s for instance).  To compound this management is no longer going to provide ecommerce sales growth and penetration metrics.  They claim the reason for this is because margin profiles are virtually identical between ecommerce and brick and mortar.  This again reeks of BS, you don’t have to be a business savant to understand it costs more to ship out an item vs. having a customer pick it up.   DICK’S asserts that they’re a “growth” company, while at the same time obfuscating data for investors.  As the kids would say; that seems hella sus.

7.      Is management rewarding shareholders?

DICK’S currently offers investors a 2.17% dividend and have $1.85B remaining on their current share repurchase program.  Although it’s difficult to forecast FCF, as I have no clue what earnings will look like 2-3 years out.  With that said management is guiding for $1.43B in operating profit this year at the low end of their guidance.  I think $800M returned back to shareholders is a fairly conservative estimate.  Additionally $DKS does issue a fair amount of stock based compensation and have convertible notes outstanding.   I would guestimate a 9.5% total shareholder yield annually (net of dilution).  This of course is excellent, but requires some faith in management to delivery. 

8.      How does the company stack up against their peers?

DICK’s biggest competitor is Big 5 Sporting Goods Corporation; $BGFV

$BGFV EV/Sales: 0.47

EV/EBIT: 4.43

Operating Margins: 10.51%

$BGFV is slightly cheaper than $DKS, but objectively one the shittiest of shitcos.  For instance, EBIT margins have been ~2.5% historically with virtually no growth.  $BGFV is so gross that DICK’S wins by default.  

9.      What’s the counter argument?

The counter argument is that $DKS is at a cyclical peak in earnings, which will begin mean reverting back to historical averages.

              I totally buy into this thesis, especially when you consider the macro backdrop.  If you’re tight on money, you’re certainly not going to buy a new set of golf clubs.  A looming recession would hurt DICK’S business much more than the average company in the S&P 500.  I don’t try to predict macro, but it would be a fools errand not to forecast some mean revision into your analysis.

10.  Is there something I think the market may be missing?

I honestly don’t think the market is missing anything here.  The optically low valuation makes all the sense in the world to me.  I’m of the mindset that EBIT margins will eventually get back to 8%, but if you disagree then the stock is probably too cheap.

Final Thoughts:

              I typically give a base here, but I don’t think that would be appropriate.  Chiefly because I haven’t the slightest idea how the future of this company will unfold.  My gut tells me that $DKS is going to be wayyy off on their guidance.  Moreover management throws off serious scumbag vibes and are ridiculously overconfident (says the arrogant man behind his computer).  When asked if there was any concern regarding the aggressive buying of inventory the CEO had the following response; “I would say this is one of our absolute core competencies….  there’s very little risk of us getting too aggressive” I understand you can’t criticize a woman in 2022, but goddamn Lauren a slice of humble pie wouldn’t kill you!!!  In closing the inability to trust management is non starter for me and for that reason I wouldn’t touch the stock with a 10-foot pole. 

***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours.  This article is intended for educational purposes only and in no way should be interpreted as investment advice