Dick's Sporting Goods (NYSE: DKS) , the largest sporting goods-focused retailer in the country, surged higher last week after clearing the low bar it had set for the first quarter of 2018.
Expectations for the rest of the year were also raised and fears over reduced firearm sales did not materialize, giving investors a lot of good news to digest. However, the report was hardly a perfect one.
First, the numbers ...
|Metric||Q1 2018 Result||YOY Increase (Decrease)|
|Gross Profit||$560.4 million||3.4%|
|Operating Profit||$87.3 million||(3.1%)|
|Earnings per Share||$0.59||13.4%|
Chart by author. Data source: Dick's Sporting Goods quarterly earnings.
Both the top and bottom lines increased during the quarter, though revenue growth was helped by a larger store base of 32 locations -- total store count was 853 at quarter-end. Also helping was a 1.2% average increase in customer purchase size.
As for earnings, a lower tax bill provided a big boost. Provision for income taxes decreased 29% compared with the first quarter of 2017 due to U.S. corporate tax reform passed in December. The company's share repurchase program was the other factor with 8% fewer shares outstanding than last year giving a boost to earnings per share. There is another $650 million left on the current repurchase program though 2021, which represents about 17% of the retailer's current market cap.
As a result of those factors, management raised its full-year guidance on earnings per share by $0.12 to a range of $2.92 to $3.12. Earnings in 2017 were $3.01, so the new forecast puts a year-over-year increase in the bottom line back in play.
Not all positive
While investors chose to hone in on the bottom line, there were still some concerns in Dick's report. Most notable was a 0.9% comparable sales decline, even when factoring a 24% increase in online sales. Adjusting for calendar shifts compared with last year (Easter, an important shopping holiday, came earlier this year), comps actually fell 2.5%.
That was the result of foot traffic once again falling at brick-and-mortar stores. Filling the void with new location openings after a wave of competitors like The Sports Authority closed down has been a key strategy for Dick's the last few years. That tailwind has subsided , though, and only 19 new stores are planned for 2018. Maybe the company will begin to find new ways to utilize its ample physical assets like other traditional retailers, perhaps doubling their role as fulfillment centers which leads to another concern.
Gross profit in the quarter was up less than revenue, and operating margins actually declined year over year. E-commerce initiatives are to blame, as investing in order fulfillment and shipping costs as well as digital store management costs money. Online-only retailers have a head start here, so it will take Dick's some time to refine its new digital craft.
While it was reassuring for investors to see earnings come in strong, the company isn't out of the woods yet. Comparable sales are still expected to be flat at best in 2018, and it would be nice to see profit margins increase along with revenue, rather than earnings getting a boost solely from lower taxes and share repurchases. Chalk this one up as a victory, but a real rebound story hasn't emerged here.
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