Dick’s Sporting Goods (NYSE: DKS) can compete with the likes of Walmart (NYSE: WMT) and Target (NYSE: TGT) and continue to gain market share because of its quality. Not all of the sporting goods products in Walmart and Target are poor quality, but many are; sporting enthusiasts who know the difference and like choice choose Dick’s—seen in the results. The results from Q2 are good, better than expected, and include improved guidance, but the takeaway is that guidance appears cautious. 

The company expects growth to continue and has raised its expectations for comp store sales. Still, it failed to match the most optimistic estimates by Wall Street analysts, a headwind for share prices today. The opportunity for investors is that this high-quality retail name is supported by secular trends that will lead its stock price to new highs in 2025, if not by the end of this year because it tends to outperform guidance and consensus estimates. 

Among the causes for concern displayed by retailers across the board, possibly impacting Dick’s outlook, is the upcoming election and its potential impact on consumer spending. While the election poses a risk, the FOMC is bigger, poised to lower interest rates and create a tailwind for economic activity. Either way, Dick’s will continue to produce solid cash flows, pay dividends, buy back shares, and build shareholder equity, a slam-dunk combination for buy-and-hold investors. 

Dick’s Builds Value for Investors in Q2 

Dick’s had a solid quarter in Q2, with comps outpacing consensus at 4.5%, driven by increased traffic and ticket sizes. The company reported $3.47 billion in net revenue, up 7.8% YoY and 11.5% in the two-year stack, outpacing the consensus reported by MarketBeat by more than 100 basis points. The results include the impact of an expected calendar shift and a single net new store but were strong enough to lead management to improve the guidance for a second time this year.

Sales strength was compounded by internal efficiencies and high-quality execution, driving leveraged bottom-line results. The gross margin improved by 230 basis points, and SG&A deleveraged by 80, leaving EBIT and net income up 48% and the adjusted earnings up by $0.55 YoY. Adjusted earnings of $4.37 also outpaced the consensus by $0.51 or 1300 basis points and the top-line strength by more than 1000 basis points. That is a critical detail because Dick’s Sporting Goods cash flow and capital return are central to the investment thesis, driving significant value for investors. 

Guidance is mixed, with revenue and earnings short of consensus. The salient details are that analysts had set the bar high, and the improved earnings outlook is up 160 basis points at the midpoint, implying acceleration from the previous year. The company expects annual growth to accelerate to over 6% in 2025 compared to the 5% growth posted for fiscal 2023. 

Dick’s Robust Capital Returns Will Continue in 2024 and 2025

Dick’s cash flow allows for a substantial capital return worth an annualized 6.5%, including share buybacks. The primary return is the buybacks, which slowed in Q2 but were sufficient to offset share-based compensation and aid a 4.5% decrease in the average quarterly share count. The dividend is currently worth about 1.9%, with shares near record highs, and is safe and reliable at 35% of the earnings. The company has increased the distribution annually for nine consecutive years and will likely do so again at the end of F2024. 

Regarding the balance sheet, highlights include a cash reduction offset by increased inventory, receivables, and total assets. Debt is flat compared to last year; liability is up slightly. However, leverage remains low with total long-term obligations, including debt running at 1.4x equity, long-term debt at 0.5x equity, and less than 1x cash. Equity is up 11% YTD and will likely grow as the year progresses. 

Dick’s Slips Following Q2 Results

The share price in DKS stock fell slightly following the Q2 release but remained above a critical support target. That target is the 30-day EMA, which will likely provide support if reached. If not, DKS shares could fall to the $220 level or lower, where they would present a deeper value. Analysts rate this stock at Moderate Buy and have been raising their price targets all year. They see it trading above the consensus $242 reported by MarketBeat, a 10% gain from the $220 level and an all-time high when reached. A move to new highs would be significant, potentially triggering a move to $290 or higher.