Financial Analysis of Dick’s Sporting Goods
The market for the sporting goods and its retailers is very fragmented and is considered highly competitive. As per the 10-K 2015 Report, the company competes with many retailing formats including traditional sporting goods stores, large format sporting goods stores, mass merchants, specialty stores, vendor stores, department stores, and many other catalog and internet based retailers. The company financial analysis is done thoroughly below, with respect to its improvement in financial position on yearly basis, and on comparative industry basis.
Ratio Analysis:
The Ratio Analysis of the company Dick’s Sporting Goods Inc. is conducted by computing various financial ratios, growth ratios, efficiency ratios, and financial health ratios. The Table 1: Financial Ratios shows the computed financial ratios comparatively analyzed on yearly basis. The data is taken from the website of Morningstar for its computations. The Gross Margin as depicted in the Figure 1 and table 1 shows that the company gross margin percentage has declined from 2014 to 2016 from 31.35 to 30%. Similarly, the operating margin has also declined from 8.65 to 7.4%. This is because of the lower merchandise margins, higher shipping expenses, and lower occupancy deleverage.
The Earnings Per share of the company has, however, remained flat in 2015, because of the lower net income this year as compared to 2014 and increase in number of shares. This is because of the growth of their store network. The company distributed dividend of $ 0.55 per share in the year 2015 having the payout ratio of 17.9%. The payout ratio has declined because of the same amount of dividend payment as compared to the last year. The working capital of the company has appreciated in 2015 but declined again in the year 2016 due to the lower current assets as compared to the current liabilities.
Figure 1: Financial Ratios
The profitability ratios are computed as depicted in the Table2, by getting figures from the website of Morningstar. The Return on Assets of the company has declined as depicted in the figure 2. This is because of the reason that the total assets of the company has increased in 2016, decreasing the return on assets for the company. Same can be said for the Return on Equity, which has decreased this year because of the increase in the equity of the company because of the share repurchase program conducted this year. The interest coverage has also declined because of the increased interest expense and decreased net income of the company.
Figure 2: Profitability Ratios
The growth ratios are computed as year on year basis. The computation is shown in Table 3 of appendices. The information is taken from the Annual Report of the company for the year 2015. The revenue of the company has increased in the year 2015 but depreciated in the year 2016. Similarly the operating income, Net income and EPS % can be also seen as following the same trend.
Figure 3: Growth Ratios
The financial health ratios computed in the Table 4 in appendices shows the portion of the assets being funded by debt and equity. The figure 4 shows that the company has increased its dependence on debt in the following years and decreased its dependence on equity.
Figure 4: Financial Health Ratios
The Liquidity Ratios of the company is computed and shown in the Table 5 of appendices. The Figure 5 clearly depicts that the company Current ratio and quick ratio has a huge difference if compared. This depicts the fact that most of the current assets of the company is bound in the form of inventories. Moreover the Current as well as quick ratio has increased in 2015, and then depreciated in the year 2016.
Figure 5: Liquidity Ratios
The Efficiency ratios of the company is computed and shown in the Table 6 of appendices. The figure 6 shows the graphical representation of these ratios. The Days Sales outstanding of the company has appreciated in 2015 and then decreased in 2016, but it is still higher as compared to the year 2014. This shows that the company inventories, or account receivable has increased increasing the credit cycle of the company. This is also evident in the Days Inventory which has increased with passage of time because of the increased number of inventory. The payables period for the company has also extended in 2016, which is good. It means that the company is now able to pay its liabilities I more time as compared to the previous years. Because of the increasing days sales outstanding and days inventory we can see that the cash conversion cycle of the company has also increasing which means the company now takes longer time to convert its inventory into cash. This is also evident in the lower inventory turnover ratio as well. The asset turnover of the company has declined because of the increment in the assets of the company and decrease in the net income of the company as compared to the previous years.
Figure 6: Efficiency Ratios
Stock Analysis/Firm Value Analysis:
For the analysis of the Firm value or its stock, discounted dividend Model has been used. The following table shows the data which is taken from the Morningstar website for the company of Dick’s sporting goods. Other than this, the IRX 13 week Treasury bill rate is taken from Yahoo finance for the computation of Risk Free Rate. Similarly the GSPC 500 Index 52 week range is taken to compute the Market Premium. The Beta of the stock is taken from the website of Yahoo Finance.
The Growth rates in stable, and higher and lower growth phases are all based on assumptions.
Data Input | ||
Earnings per share | 2.84 | |
Dividends per share | 0.5 | |
Payout Ratio | 18.80% | |
Return on Equity | 19.53% | |
Beta | 0.33 | |
Risk Free Rate | 0.36% | ^IRX 13 week treasury bills As on Nov 5, 2016 |
Risk Premium | 20.84% | |
Market Premium | 21.2% | (based on S&P 500 (^GSPC) 52 week range |
2,193.81 | 1810.1 | |
At stable growth the risk premium is lowered to reflect the maturing of the emerging markets, and the beta value is assumed to remain same | ||
Risk Premium at stable growth rate (lowered by 5%) | 16% | |
Stable Period Payout Ratio | ||
Assuming Stable growth rate decline @ 10% (lowered from expected growth rate) | 3% | |
Assuming Return on Equity @ 15% (lowered from current ROE) | 15% | |
Estimating the Value: | ||
Transition Stage : Expected Growth Rate = | lower expected g by (keep lowering until equals stable growth rate) | 3% |
Transition Stage : Payout Ratio = | increase payout ratio by (keep increasing until equals stable period payout ratio) | 12% |
Computations | ||
Cost of Equity (high growth) = | 7.24% | |
Cost of Equity (stable growth)= | 5.59% | |
Expected Growth Rate = | Retention Ratio * Return on Equity | |
Retention Ratio | 1-Payout Ratio | 81% |
Return on Equity | 19.53% | |
Expected Growth Rate | 16% | |
Stable Period Payout Ratio | 1- (g/ROE) | |
80% |
Estimating the Value | ||||||
Year | Expected Growth | EPS | Payout Ratio | DPS | Cost of Equity | Present Value |
High Growth Stage | ||||||
1 | 15.86% | 3.29 | 18.80% | 0.58 | 7.24% | 0.508 |
2 | 15.86% | 3.81 | 18.80% | 0.67 | 7.24% | 0.516 |
3 | 15.86% | 4.42 | 18.80% | 0.78 | 7.24% | 0.525 |
4 | 15.86% | 5.12 | 18.80% | 0.90 | 7.24% | 0.533 |
5 | 15.86% | 5.93 | 18.80% | 1.04 | 7.24% | 0.542 |
Transition Stage | ||||||
6 | 13.29% | 6.72 | 31.040% | 1.18 | 6.46% | 0.812 |
7 | 10.72% | 7.44 | 43.280% | 1.31 | 5.68% | 1.04 |
8 | 8.14% | 8.04 | 55.520% | 1.42 | 4.90% | 1.15 |
9 | 5.57% | 8.49 | 67.760% | 1.49 | 4.12% | 1.24 |
10 | 3.00% | 8.74 | 80.000% | 1.54 | 3.34% | 1.30 |
PV of year 7 dividend | |
Terminal Price | $ 2,140.41 |
The components of Value are as follows | ||
Present Value of dividends in high growth phase | $ 2.62 | |
Present Value of dividends in transition phase | $ 5.54 | |
Present Value of terminal price at end of transition | $ 1,541.54 | |
Value of DKS Stock/Intrinsic Value | $ 1,549.71 | |
DKS was trading at $56.72 in Nov 5, 2016 |
This computation gives us the firm value of $1549; however the company is currently trading at $56.72 which means that the company is undervalued.
Comparative Financial Analysis
For the comparative financial analysis, the competitor companies of dick’s Sporting Goods Inc are considered. This includes the companies Wal-Mart Inc. and Foot Locker Inc. The information is taken from the Annual Reports of Wal-Mart Inc., & Foot Locker Inc.
Foot Locker Inc. is a retailer company situated in America. It is involved in footwear and sportswear retailing business. Headquarter of the company is situated in Midtown Manhattan New York America. Currently Footwear is operating almost 20different countries worldwide. The company was established in 1974. It is a public company and formally known as Woolworth Corporation. The company has almost 3546 stores at present. The company earned revenue of $7.151 billion in the year 2014 and net income of the company was $5290, 000,000 dollar in the year 2014. The company has almost 44,110 employees.
The comparative analysis of the financial ratios of the three competitive companies as computed in Table 7 shows that the company which has better financial ratios in comparison is Foot Locker Inc. Foot Locker has greater gross margin percentage and higher Operating Margin percentage. However, the company is not distributing its income to its shareholders as the other two are doing. The Wal-Mart Inc. has the highest payout ratio and so is the dividend of this company.
Figure 6: Financial Ratios
The profitability ratio as depicted in the Table 7, shows that the company Foot Locker Inc. is better company in terms of the Return on Assets and Return on Equity. The interest coverage ratio is however better for the company Dicks Sporting Goods Inc showing its strong financial health, and liquidity position.
The growth ratios of the company shows that Foot Locker Inc. is way better in terms of its growth as compared to other big giants Wal-mart and Dicks Sporting Goods Inc. In fact for Wal-Mart the EPS%, Revenue%, Operating income % and net income % is negative as compared to to other companies.
The financial health ratios of the companies show that the most prudent financial health is of Dicks Sporting Goods Inc. As evident by the figure below, the company has about 50% of its asset being funded by the debt and the other 50% being funded by the equity. However, for Wal-Mart the most of its assets is funded by debt showing its dependence on debt.
The liquidity ratios of the companies in comparison show that the highest current ratio is for Foot Locker Inc. Similarly the quick ratio is also better for Foot Locker as compared to other giants. This is because of the larger number of current liabilities for Wal-mart and Dicks Sporting as compared to Footlocker Inc, which has a more efficient liquidity ratio.
The efficiency ratios of the companies shows that the better company in terms of efficiency is Wal-Mart as its payables period is lower than the others, and its cash conversion cycle and days inventory is also lower than the other two companies.
Conclusion:
It is evident from the financial and strategic analysis of the company Dick’s Sporting Goods Inc. that it has grown to its peak size, and can increase its operations by expanding its business internationally. The company is currently only focusing on e-commerce for international business. It should invest more for expansion internationally.
Also Study:
Dick’s SWOT Analysis and PEST Analysis
References:
- Berger, A. (2011). A Strategic Analysis of Colgate ́s toothpaste product line: Marketing Strategy. GRIN Verlag.
- Dick Sporting Goods Inc. (2015). Annual Report 2015. Retrieved November 5, 2016, from Dick Sporting Goods Inc.: http://www.annualreports.com/Company/dicks-sporting-goods-inc
- Office, S., & Murray-Webster, R. (2010). Management of risk: guidance for practitioners. The Stationery Office.
- Shilbury, D., Westerbeek, H., Quick, S., Funk, D., & Karg, A. (2014). Strategic Sport Marketing. Allen & Unwin.
Appendices:
Table 1: Financial Ratios
2016 | 2015 | 2014 | |
Gross Margin % | 30 | 30.6 | 31.3 |
Operating Margin % | 7.4 | 8.1 | 8.6 |
Earnings Per Share USD | 2.83 | 2.84 | 2.69 |
Dividends USD | 0.55 | 0.5 | 0.5 |
Payout Ratio % * | 17.9 | 18.8 | 19.2 |
Working Capital USD Mil | 621 | 732 | 617 |
Table 2: Profitability Ratios
2016 | 2015 | 2014 | |
Return on Assets % | 9.45 | 10.58 | 11.33 |
Financial Leverage (Average) | 1.99 | 1.88 | 1.82 |
Return on Equity % | 18.25 | 19.53 | 20.59 |
Return on Invested Capital % | 18.32 | 19.57 | 20.55 |
Interest Coverage | 133.32 | 173.94 | 187.45 |
Table 3: Growth Ratios
2016 | 2015 | 2014 | |
Revenue % | 6.7 | 9.68 | 6.46 |
Operating Income % | -3.41 | 3.21 | 2.51 |
Net Income % | -4.01 | 1.96 | 16.13 |
EPS % | -0.35 | 5.58 | 16.45 |
Table 4: Financial Health Ratios
Total Liabilities | 49.73 | 46.68 | 44.91 |
Total Stockholders’ Equity | 50.27 | 53.32 | 55.09 |
Total Liabilities & Equity | 100 | 100 | 100 |
Table 5: Liquidity Ratios
2016 | 2015 | 2014 | |
Current Ratio | 1.52 | 1.65 | 1.62 |
Quick Ratio | 0.16 | 0.28 | 0.25 |
Table 6: Efficiency Ratios
2016 | 2015 | 2014 | |
Days Sales Outstanding | 3.56 | 3.78 | 2.8 |
Days Inventory | 104.66 | 101.24 | 99.53 |
Payables Period | 46.36 | 45.43 | 45.73 |
Cash Conversion Cycle | 61.86 | 59.59 | 56.6 |
Receivables Turnover | 102.63 | 96.61 | 130.25 |
Inventory Turnover | 3.49 | 3.61 | 3.67 |
Fixed Assets Turnover | 5.7 | 5.96 | 6.46 |
Asset Turnover | 2.08 | 2.09 | 2.09 |
Table 7: Comparative Financial Ratio Analysis:
Comparison of Growth Profitability and Financial Ratios | |||
Financials | 2016 | ||
DKS | WMT | FL | |
Gross Margin % | 30 | 25.1 | 33.8 |
Operating Margin % | 7.4 | 5 | 12.7 |
Earnings Per Share USD | 2.83 | 4.57 | 3.84 |
Dividends USD | 0.55 | 1.96 | 1 |
Payout Ratio % * | 17.9 | 41.9 | 26 |
Working Capital USD Mil | 621 | -4,380 | 1,906 |
2016 | |||
Profitability | DKS | WMT | FL |
Return on Assets % | 9.45 | 7.29 | 14.72 |
Financial Leverage (Average) | 1.99 | 2.48 | 1.48 |
Return on Equity % | 18.25 | 18.15 | 21.43 |
Return on Invested Capital % | 18.32 | 12.51 | 20.46 |
Interest Coverage | 133.32 | 9.49 | 77.09 |
Key Ratios -> Growth | 2016 | ||
DKS | WMT | FL | |
Revenue % | 6.7 | -0.73 | 3.65 |
Operating Income % | -3.41 | -11.21 | 16.44 |
Net Income % | -4.01 | -10.2 | 4.04 |
EPS % | -0.35 | -9.51 | 7.87 |
Key Ratios -> Financial Health | 2016 | ||
Balance Sheet Items (in %) | DKS | WMT | FL |
Total Liabilities | 49.73 | 59.64 | 32.37 |
Total Stockholders’ Equity | 50.27 | 40.36 | 67.63 |
Total Liabilities & Equity | 100 | 100 | 100 |
2016 | |||
Liquidity/Financial Health | DKS | WMT | FL |
Current Ratio | 1.52 | 0.93 | 3.72 |
Quick Ratio | 0.16 | 0.22 | 1.59 |
Key Ratios -> Efficiency Ratios | 2016 | ||
Efficiency | DKS | WMT | FL |
Days Sales Outstanding | 3.56 | 4.69 | 4.24 |
Days Inventory | 104.66 | 45.3 | 94.28 |
Payables Period | 46.36 | 38.88 | 21.57 |
Cash Conversion Cycle | 61.86 | 11.12 | 76.94 |
Receivables Turnover | 102.63 | 77.75 | 86.19 |
Inventory Turnover | 3.49 | 8.06 | 3.87 |
Fixed Assets Turnover | 5.7 | 4.14 | 11.57 |
Asset Turnover | 2.08 | 2.39 | 2.02 |