I get the ‘hate selling’ today. Probably deserved. But I’ll buy into #hate any day when the underlying research call tells me to do so. TJX is bullet proof at 20x earnings and a decelerating 1% comp. DKS is terminal and gets sub-11x for an accelerating 2.4%. Go figure.
After the call, I actually like the story more today. We (McGough) look ridiculous today. But we (McGough) does not care. The key parts of the TREND call are there.
The negatives are clear. See my initial comments below. Here are the positives we’re learned since.
Let’s put 1Q into perspective...
- DKS missed comp, but still comped positive while every major retailer reporting last week tanked. TJX decelerated today -- more than DKS (and TJX gets a 'perma-bull multiple'.
- DKS just had ASP UP and transactions UP. It’s unlikely you’ll find that anywhere else in Retail today.
- Stores accelerated 50bp sequentially – just B&M (where can you find this elsewhere? I can't).
- e-comm disappointed, but the investment in the business is clear – not just bc of what Stack said, but it’s in the numbers. See exhibit below as it relates to increase in email promos. They finally have the capability to do it. Don’t have it right – but unless there’s a colossal #fail, we should see improvement on the margin.
Ok...on the comp guide – I get the Street needling in the Q&A about a change in 100bp in the FY guide. That’s #oldwall's job. But let’s face some facts…retailers – I don’t care how good they are – do NOT know why people do NOT shop in their stores. Ed actually alluded this in his own roundabout way. “Tax refunds probably didn’t help…people talk about that but there’s no way to know”. Do I think he should have guided lower? Yes. But maybe he does not have to…
Another thing I liked – when he said “why add more stores today when rents will be so much lower in 2-3 years? Instead, we’ll spend today to gain share tomorrow.” Would I rather him actually triple capex for three years (balance sheet can afford it) to build some kind of experiential ‘white space’ Retail#5.0 concept? Fer sure. But that’s a pipe dream for even the best retailers. But overall, I like his mindset about ‘not caring about Wall Street today to make them money tomorrow”. He might fail, but he’s one of the few CEOs who is trying.
Real Estate is DEFINITELY getting better, and it should continue. NSP went up over 1,000bps. Check out the analysis below. Sporting goods spend in each region is 2x existing DKS markets, per capita spending on SG is 20%+, and existing capacity is going away.
I get that there’s hate selling today. But I’ll buy into #hate any day when the underlying research call tells me to do so.
Our previous note on DKS from this morning.
I could argue that the pre-market sell off isn’t warranted. But it’s tough to argue with a market reaction and be right – on the day, at least.
- The bad…the comp was definitely light at 2.4%. Looks like it came from e-comm. DKS still learning how to operate the business it took over from GSIC. Does it matter that it’s one of the only specialty retailers that’s comping? No. If you ‘extend the trend’ into 2H (which I hate doing), then the comp compares definitely get very tough.
- GM% weak. SG&A much better.
- EPS hit. Guide in-line. New non-GAAP charges related to TSA, but only $0.04.
- In other words, the market is saying that there is no way our high-teens EPS growth number this year is doable. Do these numbers cast appropriate doubt? Yes, definitely. But as I said yesterday, with sentiment SO bad – on the space, on the fundamentals, and on management credibility, we gotta focus on the research call.
Here’s the link to our deck.
Event: REPLAY | Dick's Sporting Goods, Inc. (DKS)
As I noted, there are four pillars to our TREND call.
- Real Estate portfolio getting SIGNIFICANTLY better (see analysis in the deck that proves this). In today’s print, new store productivity accelerated materially from 82% to 96%. That simply does not happen in retail anymore.
- Comp getting better bc Nike and other vendors NEED it. Definitely did not accelerate meaningfully this quarter. Underlying comp improved from 1.3% to 1.5% trend line at a time when Retail Comps elsewhere are falling apart. Does the lack of meaningful acceleration mean that it won’t happen later this year as ASP accelerates and DKS actually starts marketing the better product assortment (it failed this time around)? No. But no one cares today.
- GM% should get better as lap TSA clearance, golf, hunt, etc… We saw a sequential improvement in underlying trend (ie less bad) – ie down 14bps 2-yr vs -58bps in prion qtr. But we were looking for +20bps.
- SG&A looked significantly better – not bc of cost cuts (a la KSS, JCP, etc…) but because dupe costs with running 2 e-comm business are lapped.
Is this a great print, no. But it is certainly not bad on a stand-alone basis. Unless the company drops a bombshell on this conference call, we’re likely not changing our FY17, or 18 numbers.
If our numbers are right it’s trading at sub 11x our numbers. If the consensus is right, it’s at about 12.5x. If the company misses the consensus, then who knows. But we’re relying on the research call. I’m not throwing in the towel today on our TREND call, even though the consensus view will be “see I told you so – it’s a crappy business”. It might be, buit that does not mean EPS growth won’t accelerate in 2H when everyone doubts it.
