A stellar absolute quarter for DKS. 19.8% revenue growth, 41% gross profit growth, 97% EBIT growth and 84% EPS growth. Good for a 6% EPS beat. The rate of change slowed up and down the P&L, which is generally not good for a multiple, but the real negative was management's guidance of 2021 earnings. Revenue was guided to flat, with margins down via moderate gross margin pressure but more pressure on SG&A deleverage from higher wage rates. Management's EPS midpoint comes in at down 22% YY. We're coming out ahead of that at $5.94, and we suspect the new CEO would want to keep expectations down for her first fiscal year at the helm.
The company has a new leader after a very long time with Ed Stack as the CEO. It was good to see Stack stay on the sidelines as Lauren Hobart tackled the CEO type questions even if analysts direct them toward Ed. The company is making it clear who's steering the ship. The CEO change is not a major shift, though we'd consider it a slight negative, at least in the early years of Hobart's tenure as she'll want to make edits and investments for her plan and investors might be resistant to change. Longer term it may very well be very bullish to have new leadership, that remains to be determined.
When we went bullish on ASO a few weeks back, our take was that given the multiple and margin variance between DKS/HIBB and ASO, either ASO was undervalued or DKS was overvalued settling on the former. Over the near term it appears it was a bit of both. We think sporting goods still has a solid demand runway until at least mid summer where there is clear upside to earnings expectations in 1H. Management noted there are still some categories that are supply constrained and showed bullishness around golf demand and a return in team sports, referencing elevated team sports demand in regions that are starting to pull back covid restrictions (team sports demand is good for ASO). We also think this category exits the pandemic with higher demand levels than it went in given de-urbanization and work from home are reducing time and travel barriers to sports and outdoor activity participation. We're bullish ASO, bearish HIBB, and net bearish DKS but see upside to numbers that could take the stock temporarily higher. We're not willing to give DKS a high teens PE multiple which we think is necessary for a reasonable risk/reward setup on this name long side.
For a replay or slides of our presentation Where to Invest in Sporting Goods: CLICK HERE
