Here’s why this stock is down 6% after strong second-quarter gains

Key points

• Dick’s Sporting Goods beat second-quarter earnings estimates and raised its full-year guidance.

• However, the stock price fell more than 6% on Wednesday after the earnings release.

• Should You Buy Dick’s Sporting Goods Stock on the Dip?

A popular retail-focused stock saw its stock plunge more than 6% after posting strong second-quarter earnings. What caused the drop and should investors view it as a buying opportunity?

The stock market can be a fickle thing, as Dick’s Sporting Goods (NYSE: DKS) found out on Wednesday. The major sporting goods retailer delivered exceptional second-quarter results that beat estimates and raised its guidance for the rest of the fiscal year, and yet the stock still fell more than 6% on the day.

It’s not typical for that combination of results – earnings improvement and guidance increase – to cause the stock price to plummet. But that’s exactly what happened. Here’s why.

Exceptional results in the second quarter

Dick’s Sporting Goods has been a great performer over the past few years. The stock price is up about 50% so far this year and over the past 12 months, as of September 3, it has returned 95%. In addition, over the past five years it has generated an average annualized return of 45%. It has certainly been one of the best retail stocks over that period.

The momentum appeared to continue after the retailer released its fiscal second-quarter earnings report on Wednesday.

In the second quarter, Dick’s generated $3.47 billion in net sales, up 7.8% year over year, with same-store sales up 4.5%. This was better than the $3.4 billion in revenue that analysts had predicted.

The company’s net income jumped 48% year over year to $362 million, while earnings per share rose 55% to $4.37 per share. That beat estimates of $3.83 per share.

Dick’s Sporting Goods increased its number of transactions as well as the average ticket, or price paid by the average customer for products. It also reduced its cost of goods sold as a percentage of revenue to 63.3% from 65.6% and reduced selling, general and administrative expenses as a percentage of revenue to 22.9% from 23.7%. It also increased gross profit and operating income as a percentage of sales.

“Due to our strong performance in the second quarter and the confidence we have in our business, we are again raising our full-year outlook,” said President and CEO Lauren Hobart.

Dick’s raises projections, but not enough?

The company raised its guidance for both comparable-store sales growth and earnings per share, while maintaining its net sales outlook.

Specifically, it increased its comparable-store sales growth to 2.5% to 3.5%, from the previous range of 2% to 3%. Overall, the full-year net sales target remained unchanged at $13.1 billion to $13.2 billion.

However, Dick’s raised its earnings outlook, forecasting EPS of $13.55 to $13.90, up from $13.35 to $13.75 in the previous quarter. This apparently wasn’t a high enough increase, though the median estimate was forecasting EPS of $13.79, which would be within the range, but higher than the midpoint.

Investors might have been expecting a bigger EPS increase, given the strong second quarter and 55% year-over-year increase in earnings. This may suggest to some investors that sales growth in the second half of the year could be a bit slower.

On the other hand, Dick’s may be being cautious with its projection, as it has raised its earnings outlook twice this year.

Is Dick’s Sporting Goods Stock a Buy?

Wednesday’s sell-off looks like a good opportunity for investors to pick up some Dick’s Sporting Goods stock.

I tend to think Dick’s management is being cautious with its guidance, as it has been all year. Its growth numbers remain impressive and it has reduced its expenses as a percentage of sales.

The stock is already up 50% so far this year, but it’s still a decent value, trading at 17 times forward earnings.

Wall Street analysts have an average price target of $246 per share for Dick’s Sporting Goods, which would be another 14% increase over the next 12 months. I think with interest rates set to fall, it could lead to an unexpected surge in consumer spending, particularly during the holidays.

Dick’s Sporting Goods stock is definitely a hold if you own it, and it looks like a solid buy, particularly after Wednesday’s sell-off.