Here’s why this retail stock is down 6% after strong Q2 earnings

Key points

• Dick’s Sporting Goods crushed earnings estimates in Q2 and raised its guidance for the full year.

• However, the stock price dropped more than 6% on Wednesday after earnings came out.

• Should you buy Dick’s Sporting Goods stock on the dip?

A popular retail stock saw its share price plummet more than 6% after it posted strong Q2 earnings. What caused the dip, 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 Wednesday. The leading sporting goods retailer had blowout second quarter earnings that topped estimates and raised its guidance for the rest of the fiscal year — and still, the stock was down more than 6% on the day.

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

Blowout Q2 earnings

Dicks Sporting Goods has been on a great run over the past several years. The stock price is up about 50% year to date and over the past 12 months, as of Sept. 3, it has returned 95%. Further, over the past five years it has generated an average annualized return of 45%. It has undoubtedly been one of the best retail stocks over that stretch.

The momentum seemed to be continuing 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, a 7.8% year over year increase, with same store sales rising 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 crushed estimates of $3.83 per share.

Dick’s Sporting Goods grew its number of transactions as well as the average ticket, or price paid by the average customer for goods. In addition, it lowered 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 boosted gross profits and operating income in relation to percentage of sales

“Because of our strong Q2 performance and the confidence we have in our business, we are again raising our full year outlook,” President and CEO Lauren Hobart said.

Dick’s raises its guidance, but not by enough?

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

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

However, Dick’s raised the earnings outlook, calling for EPS of $13.55 to $13.90, up from $13.35 to $13.75 the previous quarter. This was apparently not a high enough raise, even though the median estimate called for EPS of $13.79, which would be in the range, but higher than the midpoint.

Investors might have been expecting a higher EPS raise, given the strong Q2 and the 55% year over year earnings boost. It may suggest to some investors that second-half sales growth could be a bit slower.

Then again, Dick’s could just be playing things close to the vest and staying cautious with its guidance, as it has raised its earnings outlook twice already this year.   

Is Dick’s Sporting Goods stock a buy?

Wednesday’s selloff looks like a good opportunity for investors to pick up some shares of Dick’s Sporting Goods stock.

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

The stock is already up 50% YTD, yet it remains a decent value, trading at 17 times forward earnings.

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

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