HOTT Hot Topic, Inc. (MM)

Full-line sporting goods retailer, Dick's Sporting Goods Inc.’s (DKS) fourth-quarter fiscal 2012 earnings per share jumped 17% from the year-ago level to $1.03 a share that came in line with the lower end of the company’s previously provided guidance range of $1.03 – $1.05 per share. However, quarterly earnings missed the Zacks Consensus Estimate of $1.07.

During the fourth quarter, net sales grew 12% to $1,805.3 million driven by a 1.2% rise in consolidated comparable-store sales (comps), opening of new stores and contribution from an additional week in fiscal 2012. Total revenue, however, fell short of the Zacks Consensus Estimate of $1,857 million.

The increase in comps was aided by a 1.3% increase in Golf Galaxy store comps and 54.2% growth in the e-Commerce business, offset by a 2.2% decline in Dick's Sporting Goods store comps. Including the e-Commerce business, comps at the two chains – Dick’s Sporting Goods and Golf Galaxy – rose 1.2% and 1.3%, respectively.

Fourth-quarter gross profit came in at $588.7 billion, up 14.8% year over year, with gross margin expanding 79 basis points (bps) to 32.61%. Strong top-line growth along with better merchandise mix, slightly offset by increased cost of sales, drove the upside in gross margin during the quarter.

Operating income increased 14.5% year over year to $211.1 million, with operating margin expanding 25 bps to 11.74%. The year-over-year improvement in operating margin was primarily driven by expansion in gross profit margin, which was partially offset by increased selling, general and administrative (SG&A) expenses as a percentage of net sales.

We believe that the solid performance reflects the company’s sustained focus on enhancing its store network base and e-Commerce capabilities while strategically partnering with brands and executing marketing plans.

Fiscal 2012 Results

For fiscal 2102, Dick’s Sporting reported earnings of $2.53 per share, up 25.2% from $2.02 per share earned in fiscal 2012, but below the Zacks Consensus Estimate of $2.58 per share.

Net sales for fiscal 2012 escalated 12% year over year to $5,836.1 million but missed the Zacks Consensus Estimate of $5,912 million. The year-over-year improvement was driven by a 4.3% increase in comps as well as continued store expansions.
 
Financial Aspects

Dick’s Sporting ended fiscal 2012 with cash and cash equivalents of $345.2 million, shareholders’ equity of $1,587.3 million and no outstanding borrowings under its $500 million credit facility. The company incurred net capital expenditures of $219.0 million during the year. Inventory per square foot, at the end of the fourth quarter, climbed 0.7% compared with the year-ago period.

Dividend & Share Repurchases

Dick’s Sporting has always been creating value for its shareholders by returning capital in the form of dividends and share repurchases. To improve shareholders’ wealth, the company recently declared a quarterly dividend of 12.5 cents per share, payable on Mar 29, 2013 to shareholders of record as of Mar 8, 2013.

Additionally, the company authorized a new share repurchase program to buy back up to $1 billion worth of shares in the next five years. The company expects to finance these share buybacks using its cash on hand and, if needed, from its available credit facility.

Store Update

In the reported quarter, Dick’s Sporting opened 7 namesake outlets, while relocated 1 store. Additionally, the company moved 1 Golf Galaxy store to a new location. This brought the company’s total Dick's Sporting Goods stores to 518, spread across 44 states and Golf Galaxy stores to 81, in 30 states, at the end of fiscal 2012.

Guidance

For the first quarter of fiscal 2013, Dick’s Sporting expects earnings per share to come between 47 cents and 49 cents, compared with first quarter fiscal 2012 earnings of 45 cents. Comps for the upcoming quarter, adjusted for the calendar shift in fiscal 2012, are expected to decline in the range of 1% to 2%.  Excluding the adjustment, first quarter comps are expected to range between flat to 1% against an 8.4% increase recorded in the same quarter last year.

For fiscal 2013, management projects earnings in the range of $2.84–$2.86 per share, while comps are expected to increase by 2%–3%. This compares to the company’s adjusted earnings per share of $2.53 in fiscal 2012 and comps growth of 4.3%.

During fiscal 2013, the company targets to open 40 new namesake stores and relocate 1 of them. Additionally, the company expects to complete the remodeling of 4 Dick’s Sporting Goods stores, while 75 stores are expected to be partially remodeled. Moreover, the company plans to open 1 new Golf Galaxy store and relocate 1 Golf Galaxy store in fiscal 2013.

For fiscal 2013, the company expects to incur capital expenditures of $299 million on a gross basis and $258 million on a net basis.

Dick's Sporting currently has a Zacks Rank #3 (Hold). Other stocks performing well in the retail space include Big 5 Sporting Goods Corp. (BGFV), which has a Zacks Rank #1 (Strong Buy), Cabela’s Inc. (CAB) and Hot Topic Inc. (HOTT), both of which carry a Zacks Rank #2 (Buy).

 
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