Here’s the real-time exchange between me and McLean during the DKS call. Not spell checked, grammar checked edited, whatever…
BM
Why is DKS down 8%?
JM
Not sure exactly
You have a notable comp slowdown (150 bps on 2yr), but i think guide is doing most of it.
There was some bad messaging/guidance around ecommerce but the stock moved before the call started.
Big move happened at opening so my sense is someone dumping.
BM
well...that's ALWAYS the case when stocks go down. more sellers than buyers. but for an 8% move on a headline beat with such a small guide and such big implied EPS growth, there HAS TO be something else.
if i was a PM and a retail1.0 analyst said 'its overblown' without that context, i'd think he's JV
you are Varsity material if I’ve ever seen it
JM
Capex was guided up 10%, could be cash flow read.
FCF flat yy in our model, just a 2.4% FCF margin, down 20bps. Management disclosed on the call that they are adding a DC which is incremental $50mm.
Also have this vendor assessment they announced where they are cutting 20% of vendors and elevating core brands... that's a risk to maybe 5% of sales by my math. But I read it as bullish, taking up price by replacing lesser brands, and sharing investment costs with the core brands. Like the FL move of the last 7 years.
What do you think the market is missing?
BM
You pretty much just answered it. They’re only able to do this bc Nike is taking up price point by 5-10%. Not a 2qtr blip. W 4.8% of Nike US distro going away last year, it needs these guys more than ever. And they’ll do in the fall. And in ’18, then DKS will get FlyKnit machines…yada yada yada…
The reality is that DKS has not comped consistently in years.
What happens when it comps, comps again and comps again after everyone thinks Sporting Goods is fully Amazoned – AND 75% of AMZN incremental capex is going to sell eggs, OJ and Porterhouse steaks?
Give me more color on comps…
JM
Slowed 150bps on a 2 year basis, but the Dick's felt a drag from weak firearms and ammo sales. Check out the firearms registration stats for Feb – down 12%, Jan down 20%+. Cabela's comped down 6.5% in 4Q. No excuse, but keep that in context of a 5% comp. and the stores comped positive for the third q in a row -- hasn’t happened since 2012.
Add on the fact that DKS hand picked TSA/Golfsmith stores in the best markets and best properties. NSP was over 90% this q. It should continue – and then they should accelerate as set new maturation hurdle.
BM
What’s up w e-comm – color on the call seems counterintuitive.
JM
Yep. In Q&A, Stack said that DKS does not expect to maintain a 20%+ ecommerce growth rate. Either he’s failing, or sandbagging.
Just took it in house and has full control over functionality, marketing, service, etc. any prior platform hindrances should be gone. If you aren't expecting acceleration, you probably shouldn’t have launched until all the pieces were in place to create a prolonged acceleration.
The company will get the boost in year 1 from eliminating a ~20% royalty on ecommerce sales, but we think that the shift to ecommerce will be moderately margin dilutive thereafter even with cost leverage in the business.
BM
On the margin. DKS has historically described ecommerce margin to be very close to 4-wall store margin, and that it would soon be the same. Never sat right with me. It would be fine to say ecommerce margins are not far off the stores, but they are lower. That’s definitely a change. Not a thesis changer. But a changer.
JM – nothing changed bigger picture, unless I’m missing somethin
In the last twelve months about 8% (23mm SQFT) of the sporting goods B&M capacity has gone away. Gander Mountain and Cabela's each facing serious operational issues and possible restructuring are another 4.5% of capacity. DKS sits at about 11% of sporting goods square footage and growing, including taking over the best properties of the closing big box franchises.
When electronics stores started going bankrupt at the end of the last economic cycle, BBY was left for dead. Today it still holds nearly $40bn in sales and $14bn in equity value. There is an advantage to being the last national B&M player in a category, and DKS is in the strongest position of any sporting goods retailer.
Nike, UA, and Adidas all need a strong sporting goods distribution presence.
If footwear ASP is going up 10%, a 3% comp starts to look very doable.
The stock is trading just under 13x the guided 2017 EPS number. If DKS can comp 3%+, and grow earnings 20%, this stock has gotta work in 2017.
BM
True dat. DKS never trades at a trough 13x multiple when revenue margins and cash flow are accelerating. Let’s move this one higher on our list of longs. I like buying into the sell-off. The story has not changed as much as the mkt cap has – and we’re getting validation on the core of the call (asp shift). Hit it…
