DKS: Kicking off 2012

Conclusion: We expect a solid quarter, driven by not only healthy footwear and apparel sales in the athletic specialty channel, but an incremental boost from golf and youth bats. In addition to reaccelerated store growth that got us positive on DKS back in January, multiple tailwinds have since developed that we expect to drive upside in 2012.


 

TRADE (3-Weeks or Less): We’re at $0.40 for DKS headed into Tuesday’s print before the market open ahead of Street estimates at $0.38E.         

  • We’re modeling comps up +5.5% vs. +4.3%E and sales up 14% vs. +10.5%E driven primarily by footwear and equipment sales.
  • February and March footwear sales in the Athletic Specialty channel have come in strong up mid-teens in support of bullish reads from both FL and FINL. While April is up against a tougher compare, it’s the lowest volume month representing ~25-28% of Q1. We expect sales up LSD-MSD in April suggesting low double-digit footwear comps for the quarter. With footwear accounting for ~20% of total sales, we expect footwear to drive over 2pts of comp.
  • Apparel sales have been tracking at a more modest pace relative to footwear up MSD, which should add ~1pt to total comp.
  • Equipment is the big variable headed in the quarter. Golf continues to come in strong YTD across multiple metrics. With a strong start to the year, continued demand for TaylorMade drivers (Adidas raised its sales outlook due in part to this factor), and favorable weather compares in April, we expect golf to add roughly 1pt to comp. In addition, baseball bat regulation changes that are prompting a replacement cycle this season could account for another 1pt+ of comp.
  • While our top-line expectations are more robust, we are modeling GMs up +40bps only 10bps higher than consensus expectations due to residual cold weather inventory left to be cleared from Q4 as well as a greater sales contribution from lower margin hardgoods. Occupancy leverage will be the primary driver of gross margin expansion.
  • We expect SG&A of $296mm to come in higher than expected ($285mm) reflecting increased store investments offset in part by lower advertising costs.

TREND (3-Months or More):

The product cycle continues to improve while DKS comps are relatively easy. In addition to positive trends in apparel and footwear, there were a flurry of announcements in April that at in isolation don’t mean much, but combine the following a) its purchase of Top Flight, b) acquisition of minority interest in JJB Sports (with call option for majority interest in 1Q13), c) our recent analysis showing a meaningful improvement in its lease duration risk, d) equipment traffic drivers like Bubba Watson’s Pink Ping Limited Edition club come June and baseball bat regulation changes, and you have a series of positive intermediate-term traffic and sales drivers. Many people say that equipment does not matter because of the low margins. But it gets a heck of a lot more profitable when the shopper also walks out of the store with a shirt or pair of kicks. When we plug these factors into our model, it gets us above consensus for not only this quarter, but also for this year ($2.50 vs $2.43E) and next ($3.00 vs. $2.80E).


TAIL (3-Years or Less):

DKS’ recent acquisition of Top Flight, and shift to the UK with a minority stake in JJB Sports is noteworthy. That converts into a call option for a controlling stake in 1Q13. Specialty retail is historically a regional business. DKS might not only evolve into the preeminent national retailer, but perhaps global as well. At $48, DKS is trading at 19x and 16x this year and next year’s earnings toward the lower end of its 10-year range. While our model suggests 20% earnings growth over the next two years with potential for upside from international growth opportunities, DKS probably isn’t going to make you rich here, but we are still positively inclined on the name.



Casey Flavin

Director