DICK S Sporting Goods, Inc.

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1 March 13, 2015 DICK S Sporting Goods, Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 09/03/2014 Current Price (03/11/15) $56.31 Target Price $ Week High $ Week Low $41.90 One-Year Return (%) 1.08 Beta 1.20 Average Daily Volume (sh) 1,223,658 Shares Outstanding (mil) 120 Market Capitalization ($mil) $6,846 Short Interest Ratio (days) 2.17 Institutional Ownership (%) 74 Insider Ownership (%) 20 (DKS-NYSE) SUMMARY DICK S Sporting has been continuing its upward trajectory with successful expansion of its omnichannel network, powerful marketing and merchandising strategies, as evident from the fourth-quarter financial results. The company also provided an optimistic outlook for fiscal DICK S Sporting s growth prospects appear promising as its strategic measures of consolidating its store base and using technology to provide better services ensure healthy relationship with existing customers while attracting new ones. We appreciate the company s decision to reduce exposure in the underperforming golf and hunting categories which will allow it to focus on profitable ventures. However, the stock remains vulnerable to sluggish economic recovery and cautious consumer spending. Risks of sourcing merchandise from overseas markets may also drag its results going forward. Risk Level * Average, Type of Stock Large-Growth Industry Retail-Misc/Div Zacks Industry Rank * 102 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) Annual Cash Dividend $0.55 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 8.9 Earnings Per Share (%) 18.0 Dividend (%) 19.1 using TTM EPS 19.6 using 2015 Estimate 17.8 using 2016 Estimate ,334 A 1,531 A 1,401 A 1,947 A 6,213 A ,439 A 1,689 A 1,527 A 2,160 A 6,814 A ,562 E 1,842 E 1,673 E 2,347 E 7,424 E ,060 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) 2013 $0.48 A $0.71 A $0.40 A $1.11 A $2.69 A 2014 $0.50 A $0.67 A $0.41 A $1.30 A $2.87 A 2015 $0.53 E $0.76 E $0.47 E $1.40 E $3.16 E 2016 $3.57 E Zacks Rank *: Short Term 1 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 13 * Definition / Disclosure on last page (Note: Qtly. fig. may not add up to annual fig. due to rounding off) Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Pennsylvania-based DICK S Sporting Goods Inc. was founded in 1948 and operates as a full-line sporting goods retailer. The company offers athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, water sports, etc. DICK S Sporting also owns Golf Galaxy Inc., a multi-channel golf specialty retailer, e- Commerce websites and catalog operations. The company operates 4 kinds of stores a) single-level Dick s Sporting stores of approximately 50,000 square feet, b) two-level DICK S Sporting store of approximately 80,000 square feet, c) DICK S Sporting stores for smaller markets of about 35,000 40,000 square feet, and d) 13,000 18,000 square feet Golf Galaxy stores. DICK S Sporting stocks nationally recognized brands such as Callaway Golf, adidas, TaylorMade-adidas Golf, The North Face, Asics, Under Armour, Nike, Columbia and Remington. REASONS TO BUY The Inherent Strength: DICK S Sporting s unique strategy of offering exclusive branded merchandise, sourced from leading manufacturers, provides it with a platform to better compete with other players. Furthermore, the company leverages its strong vendor relationships to source overstock and closeout merchandise at substantial discounts, in order to achieve dual objectives of boosting gross margin while offering compelling value to customers. Reducing Exposure to Underperforming Categories: We appreciate the company s decision of reducing exposure in the golf business as the category has been grappling with weaker demand for the past several quarters mainly due to a sluggish recovery of the U.S economy. Moreover, the new generation s least interest for the game and too much competition in the industry has hurt the company s top and bottom lines so much that it is now contemplating whether to remain in the business or not. Looking at the recent developments and surveys in the golf equipment business we are expecting a further downfall in this sporting category. We believe DICK S Sporting s diversified product portfolio will facilitate its easy survival even if it shuts down the golf operations. This will not only help the company to reduce costs but will also provide more floor space to the other outperforming categories thereby boosting its top and bottom lines in the long-run. Long-Term Targets Point toward Growth: The company has been aggressively expanding its store base and ecommerce capabilities to achieve its long-term revenue target of over $10 billion by the end of fiscal This is expected to include a contribution of nearly $1.1 billion from ecommerce sales compared with $491 million in fiscal 2013-end. To achieve this target, DICK S Sporting intends to increase its retail store count to 800 by the end of fiscal 2017 from 558 namesake stores at the end of fiscal 2013, and invest in the improvement of ecommerce capabilities. Working toward these goals, the company has successfully completed its target of opening 45 new stores in fiscal 2014 and its ecommerce penetration reached 9.2% of total sales at the end of fiscal We believe that the company s strategic measures of consolidating its store base and the use of technology to provide better services will enhance its relationship with present customers and also attract new ones. Moreover, these measures are likely to effectively promote DICK S Sporting s products, thereby boosting its top and bottom lines. Healthy Balance Sheet & Strong Cash Flows Driving Growth: DICK S Sporting ended the fiscal year with cash and cash equivalents of about $222 million and without any outstanding borrowings under its $500 million credit facility. Moreover, the company continues to efficiently utilize cash flows to accomplish its long-term growth target via omni-channel development and store openings as well Equity Research DKS Page 2

3 as by funding share repurchases and paying quarterly dividends. In fiscal 2014, the company generated cash of nearly $606 million from operational activities and returned over $260 million to shareholders through stock buyback and dividend payments. REASONS TO SELL Macroeconomic Issues: The sporting goods retail industry is a consumer-driven industry and hence very sensitive to the health of the economy as sports is majorly a leisure activity. Spending on sporting goods is heavily dependent on the disposable income of consumers. The current macroeconomic challenges such as high household debt and unemployment levels may restrain consumer spending on sporting goods items. Seasonality Affects Performance: DICK S Sporting s business is seasonal in nature and typically generates stronger sales during the fourth quarter, which is characterized by the holiday and winter sports selling seasons. As a result, the company is exposed to significant risks if the seasons fail to deliver expected operating performance. Risk of Sourcing from Overseas Market: A significant portion of DICK S Sporting s merchandise is manufactured in countries outside the U.S. such as China, Taiwan and South Korea. Accordingly, the company is exposed to political, social and economic risks associated with the operations in these countries. Further, an adverse movement in foreign currency exchange rates may dent the company s operational performance. RECENT NEWS DICK's Sporting Q4 Earnings Beat on Growth Strategies Mar 3, 2015 DICK S Sporting Goods Inc. has been continuing its growth trajectory with successful expansion of its omni-channel network, powerful marketing and merchandising strategies, as evident from the fourthquarter financial results, reported yesterday. The company s consolidated earnings of $1.30 per share for the fourth quarter of fiscal 2014 not only surpassed management s earlier prediction of $1.18 $1.28 and the Zacks Consensus Estimate of $1.22, but also increased 17.1% from the year-ago quarter. Quarter in Detail Total sales grew 10.9% to $2,160 million in the quarter, primarily driven by store openings, increased ecommerce business and improved consolidated comparable-store sales (comps) performance. Total revenue beat the Zacks Consensus Estimate of $2,115 million. The company s consolidated comps increased 3.4%, compared with a 7.3% rise in the prior-year period, which was higher than its guidance range of 1% 3%. The increase was driven by rise in both ticket and traffic. Comps at DICK S Sporting Goods stores increased 3.8%, while comps at Golf Galaxy stores declined 7.1%. Excluding golf and hunting businesses, the company s comps jumped 6% during the quarter on the back of strong performance at other owing to its merchandizing and space allocation strategies. The Equity Research DKS Page 3

4 year-over-year rise in comps at DICK S Sporting Goods stores was primarily attributable to increase in most categories of apparel, footwear and hard lines. Driven by the growth of its omni-channel network, DICK S Sporting s ecommerce business constituted 14.4% of the total sales in the reported quarter, compared with 12.2% in the year-ago quarter. Gross profit in the reported quarter came in at $691.3 million, up 19.3% year over year. However, gross margin contracted 25 basis points (bps) to 32%, primarily due to a 64 bps reduction in merchandise margin, higher shipping costs owing to a rise in ecommerce sales and increased promotional levels, offset by favorable occupancy leverage. Operating income for the quarter rose 12.3% year over year to $250.5 million while operating margin expanded 15 bps to 11.6%. The improvement in operating margin was primarily due to lower administrative and payroll expenses, as a percentage of sales, offset by gross margin contraction. Fiscal 2014, in Brief DICK S Sporting reported net sales of $6,814.5 million for fiscal 2014, up 9.7% year over year and ahead of the Zacks Consensus Estimate of $6,771 million. Comps for the year increased 2.4%. Adjusted earnings per share increased 6.7% to $2.87 and were ahead of the Zacks Consensus estimate of $2.79 per share. Financial Aspects DICK S Sporting ended fiscal 2014 with cash and cash equivalents of $221.7 million and shareholders equity of $1,832.2 million. At fiscal year-end, the company had nearly $500 million as outstanding borrowings under its revolving credit facility. During fiscal 2014, DICK S Sporting generated cash flow of $606 million from operational activities. Total inventory at the fiscal year-end grew 12.9% on a year-over-year basis, while net capital expenditure for the year totaled to nearly $349 million. During fiscal 2014, the company invested its capital in omnichannel growth and returned over $260 million to shareholders in the form of dividends and share repurchases. Dividend & Share Repurchases DICK S Sporting has always created value for its shareholders by returning capital in the form of dividends and share repurchases. To boost shareholder wealth, the company, on Feb 18, declared a quarterly dividend of $ per share on its Common Stock and Class B Common Stock. This will be paid on Mar 31 to shareholders of record as of Mar 13. During fiscal 2014, DICK S Sporting repurchased about 4.3 million shares for a total sum of $200 million. Since the announcement of its $1.0 billion share repurchase program in Mar 2013, the company has repurchased over $455 million worth of its common stock and has about $545 million remaining under its authorization. Store Update In the reported quarter, DICK S Sporting opened 6 namesake stores and closed 6 Golf Galaxy stores. This brought the total store count as of Jan 31, 2015, to 603 DICK'S Sporting Goods stores across 46 states, 78 Golf Galaxy stores in 29 states and 10 Field & Stream stores in five states. Equity Research DKS Page 4

5 Guidance For fiscal 2015, the company projects earnings per share of $3.10 $3.20. The guidance assumes shares outstanding in the range of million and expectations to repurchase about $100 $200 million worth of shares. Comps for fiscal 2015 are expected to grow in the range of 1% 3%, compared with a 2.4% increase in fiscal For fiscal 2015, the company continues to anticipate capital expenditure of $365 million on a gross basis and $245 million on a net basis. Further, during the fiscal year, the company plans to open about 45 DICK S Sporting Goods stores and nearly 9 Field & Stream stores. The company also expects to relocate 9 namesake and 1 Golf Galaxy stores. Further, management remains positive about first-quarter fiscal 2015, anticipating earnings per share in the range of $0.49 $0.53, with estimated shares outstanding of 120 million. Comps for the first quarter are expected to remain flat or increase by 2%. During the first quarter, the company plans to open about 9 DICK'S Sporting Goods stores and 1 Field & Stream store. At the same time, it expects to relocate 1 each of DICK'S Sporting Goods and Golf Galaxy stores. DICK S Sporting Expands Presence in Georgia and Florida Mar 2, 2015 DICK'S Sporting Goods Inc. is progressing with its store expansion plans at full throttle, as apparent from its announcement of opening two new stores on Mar 13. The celebrations for the launch of these stores, located at East Cobb Crossing in Marietta, GA, and at Cortez Commons in Brooksville, FL, will continue over the weekend. The new stores, which will mark the company s 19th one in Georgia and its 34th outlet in Florida, will expand its store count to 608 across the United States. These stores will offer over 40 suitable in-store services provided by DICK'S certified PROS in sports and outdoor specialties like Golf, Bike and Fishing. Moreover, the new locations will house Under Armour Inc. and Nike Inc. shops. They will also include athletic clothing and footwear along with the latest equipments for team sports, fitness, camping, hunting and fishing. In order to attract customers to its new stores, during the celebration period, DICK S has announced a range of lucrative giveaways. The company will distribute free Reebok Play Dry T-Shirts to the first 100 people in queue on the opening day. Also, the early birds will get an opportunity to open the DICK'S Sporting Goods Gift Locker on all the three days. Moreover, on Saturday and Sunday, it plans to give away free Mystery Gift Cards worth $5 $500 to the first 100 adults in line. Additionally, visitors at the Florida store will get a chance to receive tips from professional anglers at the 4,000 gallon DICK S bass tank. The company has also invited former Atlanta MVP Dale Murphy to make a special appearance at the Georgia store on Saturday. At the Florida outlet, Addictive Fishing host Blair Wiggins will charm customers on Friday, while on Saturday conservationist Guy Harvey will make an appearance, alongside The Florida Aquarium with free child admission coupon. Equity Research DKS Page 5

6 DICK S Sporting Goods Announces Dividend Hike of 10% Feb 23, 2015 Dick's Sporting increased its quarterly dividend by 10% to $ from $0.125 per share. This brings the yearly dividend to $0.55 per share, reflecting a dividend yield of nearly 1% based on the increased dividend and last closing stock price of $ The new dividend will be paid on Mar 31, 2015 to shareholders of record as of Mar 13, VALUATION DICK S Sporting s current trailing 12-month earnings multiple is 19.6x compared with the 23.7x industry average and 17.8x for the S&P500. Over the last 5 years, the company s shares have traded in a range of 15.9x to 26.2x, trailing 12-month earnings. The stock is trading at a discount to the industry average based on forward earnings estimates. Our target price of $59.00, 18.8x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low DICK S Sporting Goods Inc. (DKS) Industry Average S&P PetSmart Inc. (PETM) Bed Bath & Beyond Inc. (BBBY) Barnes & Noble Inc. (BKS) N/A 6.6 N/A Tractor Supply Company (TSCO) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA DICK S Sporting Goods Inc. (DKS) Industry Average S&P N/A 2.0 N/A Equity Research DKS Page 6

7 Earnings Surprise and Estimate Revision History Equity Research DKS Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DKS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform %, Neutral %, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research DKS Page 8