DKS: Supports our Bullish View on the Space

Crusher quarter for DKS. Inventories relative to sales and margins are among the best reported yet this EPS season. Yes, there are some elements that are DKS-specific. But we think it’s a signal of more to come in this space.

Nice, clean beat for DKS, with EPS coming in at $0.22 vs. our estimate and the Street at $0.17.

  • Q3 results primarily comp driven posting +5.1% versus outlook for +1%-2% with growth in each segment:
    • Core Dick’s up +3.8%; Golf Galaxy up +2.4%; and +82% increase in e-commerce – which was the greatest driver.
    • Better than expected profitability +150bps reflecting a sequential acceleration on the 2yr margin growth rate, with an even easier comp ahead in Q4 – could be early indications of positive benefits from closing underperforming GG stores.
    • Inventories up +5% on +9% sales growth reflecting considerably more stable spread relative to retail peers. This is key, as we are seeing 9 out of 10 retailers print a meaningfully unfavorable delta in both sales/inventory spread and margins (as represented by the SIGMA chart below).
    • Better than expected results despite facing difficult compares vs. last year when unseasonably colder weather pulled forward what management estimated to be $0.03 of sales forward from Q4.
    • Raised FY outlook:
      • Comp outlook for +3-4% in Q4. But what’s notable is that the company only needs +4.5% to keep comps flat on sequential basis. They’re giving conservative guidance – especially in the face of a strengthening product cycle. They’re giving themselves a pad as it relates to consumer weakness.
      • $0.06 EPS beat in Q3 AND raising FY EPS by $0.10 suggesting continued strength through Q4.

One thing that’s worth noting is that DKS’ apparel mix is 28% of total. This compares to Foot Locker at around 9%. People seem to think that it is only the brands and those that directly procure cotton that are in trouble. Not so – by a long shot. It is a cost that will be absorbed in all critical pressure points throughout the supply chain – from Asia, to the Brands, to the Retailers, to the Consumer. To think that DKS won’t feel some pressure here is simply irresponsible.  Let’s see how they address it on the call.

DKS: Supports our Bullish View on the Space - DKS CompG 11 10

 

DKS: Supports our Bullish View on the Space - DKS S 11 10