J.P. Morgan reiterated its “Overweight” rating on Dick’s Sporting Goods as it expects “near-term comp” benefit from the Philadelphia Eagle’s Super Bowl win and an equal benefit from new Little League bat regulation.
In a note released February 7, Christopher Horvers, the lead analyst at J.P. Morgan, wrote that he expects a 100 basis point lift to Dick’s same-store sales from the Eagle’s win with more than half accruing to Q118. The lift represents a comparable benefit to Q416 from the World Series win by the Chicago Cubs.
“From a similarities perspective, both the Cubs and Eagles have rabid fans that have been starved for a championship for decades,” wrote Horvers. Four percent of Dick’s stores are in Illinois, while five percent are in the eastern half of Pennsylvania, southern New Jersey and Delaware, where the Eagle’s fan base resides.
Due to the Super Bowl occurring on the first day of Dick’s first quarter, J.P. Morgan expects the benefit of the win to support both the fourth and first quarter, “albeit weighted to the first quarter of 2018.”
Finally, compared to the Cubs-victory benefit, Horvers noted that NFL jerseys are likely a popular item to purchase for Eagles fans and carry a higher price than the baseball T-shirt.
At the same time, the analyst expects a potential 50-75 basis-point lift to Q118 comps from Little League Baseball’s requirement that teams replace their bats under a new “USABat” standard. A lesser benefit is expected in Q2 from the change.
Horvers estimates this affects 1.6 million participants at the youth level. He added that the lift could be similar to the impact from the BBCOR regulation that affected high school age and college baseball participants in 2012. Dick’s officials at the time said the Q1 benefit was “less than 1%” while the Q2 benefit was “small” and “much greater in 1Q than 2Q.”
Overall, J.P. Morgan said it remains “Overweight” on Dick’s in part because it’s positioned as “long-term survivor in the specialty sporting goods sector” similar to Best Buy in the consumer electronics channel. The investment firm also expects Dick’s will benefit from the clean-up of inventories in the athletic space in the first half of 2018, efforts by Nike to clean up its distribution, and its private label investments. Efforts by Under Armour to further differentiate its mix at Dick’s could also help.
Horvers also said Dick’s should benefit from investments in stores and customer service, much like similar steps have paid off for Home Depot, Best Buy and Wal-Mart.
Finally, Dick’s early forecast calling for earnings to decline “up to 20 percent” this year due to margin pressures “minimizes the risk to earnings misses, particularly in the first half of the year, given the expected declines in merchandise margins.”
J.P. Morgan has a price target of $43.00 on Dick’s.
J.P. Morgan’s note comes after analysts at Barclays on February 5 downgraded their view on Dick’s to “Underweight” from “Equal Weight.” Barclays said that while sentiment on Dick’s stock has recently improved due to the theory that Dick’s situation may be similar to Best Buy’s in the electronics space, the investment firm doesn’t see the connection.
Wrote Matthew McClintock in a note, “We question how the DKS business model of a physical sporting goods box (i.e. “access to product”) with a sparse labor model and no treasure hunt aspects will remain relevant as changing consumer preferences increasingly require intensive and specialized service/experiential levels to compete.”
McClintock believes Dick’s is ”not positioned to sell the stylish athleisure product that the industry has evolved into” and believes the chain may be losing market share in activewear to department stores that are better positioned to service the category.
“Beyond the physical differences in store environment, we believe a vastly different labor model is required to sell premium athletic apparel,” he claimed, in light of Nordstrom having two times the employee coverage and Dick’s and Lululemon having ten times.
Barclay’s also noted that while Dicks plans to expand private label offerings, the company “has not yet demonstrated a meaningful proficiency in running a private label business.” Calia, for instance, will be challenged earning its premium positioning, given its lack of brand awareness and the chain’s lean labor structure
Finally, Barclays noted that Dick’s has “substantial exposure” to weak hunting trends with firearms background checks remaining soft and the departure of chief merchant Keri Jones, “does not bode well for a quick turnaround.”
Barclay’s noted that Dick’s management has “acknowledged the need to make significant investments into the underlying business,” including in e-commerce, store technology, store payroll, Dick’s Team Sports HQ and private label brands. McClintock, however, concluded, “We believe the company has a long pathway towards transforming the business back to positive earnings growth.”
Barclays decreased its price target to $25 from $33.
On Wednesday, shares of Dick’s closed at $31.72, up $1.06, or 3.46 percent.
Photo courtesy Dick’s Sporting Goods