Dick’s fourth-quarter results were in line with its preannouncement, although we view additional perspective on its outlook as a positive. Near term, the outlook calls for healthy comp-store sales growth despite the adverse weather conditions throughout much of February, which are wreaking havoc in many parts of retail.
While weather favorably affected parts of the fourth quarter, the significant comp-store sales outperformance leads us to believe that additional advertising, stepped-up store labor, and opening-price-point tweaks are working. Moreover, e-commerce penetration is increasing at a rapid clip and is well above market growth rates, driven by continued omnichannel investment and the company’s exclusive relationship with ESPN. Management expects the bulk of gross margin improvement over the next several years to come through increased e-commerce profitability; e-commerce is expected to be more profitable than stores by 2017.
The company is seeing strong conversion from mobile devices and indicated its ship-from-store capability has greatly reduced shipping costs. The new Field & Stream concept also appears to be performing well out of the gate from a sales and four-wall profit perspective. We believe shares can work higher in the near term on improved sales trends and easier comparisons, especially relative to modest valuation levels.
Fourth-quarter EPS of $1.11 were in line with the company’s updated expectations released early in February and were roughly $0.06 higher than the midpoint of management’s original forecast. The earnings beat (from the initial outlook) was driven by top-line growth of 8% (initial guidance called for 3% to 4%) as both comp-store sales growth (6.3%) and new-store productivity performed better than expected. Management indicated that the severe winter benefited the company’s performance—cold-weather related products led the strong sales performance. E-commerce penetration was particularly strong, representing 12.2% of sales, a 360-basis-point increase from 8.6% of sales last year (implying 53% growth).
Meanwhile, gross margins declined 30 basis points year-to-year, to 32.3%, 60 basis points lower than our forecast; however, merchandise margins were up in the period but were more than offset by the calendar impact (53rd week), which limits the company’s ability to leverage occupancy, combined with a greater shift to the lower-margin e-commerce channel. SG&A expense came in better than our projection (by 30 basis points), deleveraging by 10 basis points year-to-year.
Management expects its full year 2014 EPS outlook to range from $3.03 to $3.08, representing growth of 13% to 15%, which is consistent with the guidance it provided on February 10. Comp-store sales (including e-commerce) are expected to increase 3% to 4% after a 1.9% increase in 2013. The company expects slight gross margin improvement and slight SG&A leverage.
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