<span style="color: #a1a1a1;">Oppenheimer upgraded its rating for Dick’s Sporting Goods to “Outperform” from “Perform” due to expected strength in the sporting goods category amid the pandemic.
Oppenheimer also established a 12-to-18-month price target of $52.
On Tuesday, when Oppenheimer’s note came out, shares of Dick’s closed at $39.23, down 2 cents, on the New York Stock Exchange. The stock has rebounded after closing as low as $13.46 in mid-March when the pandemic emerged.
“For some time, we have maintained a rather respectful, but somewhat cautious, approach toward Dick’s Sporting Goods and the Company’s equity owing to our view that while DKS represents the clear winner and “last man standing” among leading sporting goods superstores, that the Company continues to contend with seemingly structural weakness in key, legacy categories and the longer-term risk of increasingly strong brands such as Nike (NKE) shifting to more of a direct-to-consumer business model,” wrote Brian Nagel, Oppenheimer’s lead analyst in the space in a note. “In our view, DKS and the Company’s robust omnichannel business model are positioned to capitalize upon improving consumer demand for items associated with consumers now spending more time at home and poised to further benefit as shoppers shift back to team sports and licensed products.”
In the near-term, Nagel expects Dick’s to likely continue to benefit from “outsized spending” in categories such as bikes, fitness equipment and outdoor due to a shift in consumer spending toward sporting goods products “that appeal well to now ‘more time-rich’, ‘less traveled’ shoppers, seeking to enjoy the outdoors and other recreational activities.”
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In the medium-term, Dick’s could benefit from “a potentially significant resurgence in consumer demand in core categories as youth sports leagues and professional athletic activities resume.”
On the operational side, Dick’s “well-developed omnichannel operating model” has allowed the Company to stay connected with core customers despite store closures and “lends to improving efficiencies as physical units re-open.”
Nagel noted Oppenheimer’s closer inspection of spending dynamics finds underlying trends in consumer spending “remain relatively healthy” albeit with shifts tied to changes related to the pandemic. Nagel wrote, “Instead of pulling back completely, shoppers have instead quickly shifted spending patterns primarily to categories associated with “staying at home” and toward operators with well-developed and consumer-friendly online functionality.”
The strength was evident as Dick’s reported robust online gains and a healthy pick-up in sales as stores reopened when it reported first-quarter earnings on June 2. Particularly encouraging were Dick’s revenues through the first four weeks of the second quarter, down only 4 percent despite 44 percent of the company’s stores still being closed. Online grew more than 250 percent over that period.
The upgrade is also supported by a potential easing of competitive pressures and related renewed commitment from the larger athletic brands in Dick’s role as a strategic partner should COVID-19 drive further consolidation in the sector. Also cited was the retailer’s healthy balance sheet that is enabling continued investments amid the pandemic as well as a depressed stock valuation relative to historical levels.
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For 2020, Oppenheimer expects Dick’s to earn 37 cents a share, in line with Wall Street’s consensus target. For 2021, Oppenheimer expects earnings of $3.54 ahead of Wall Street’s current consensus estimate of $3.37. In 2019, Dick’s earnings were $3.69.
Nagel nonetheless described the Outperform rating as “generally shorter-term and tactical in nature” given his still long-term concerns about direct-to-consumer (DTC) expansion ambitions by the top athletic brands. Nagle wrote, “We remain concerned that in the coming years improved online and DTC operations of leading brands such as Nike (NKE) and awareness on the part of the leadership of such organizations as to the incremental profit potential of selling to and connecting with consumers directly could undermine somewhat DKS as a preferred distribution partner for higher-quality more premium products.”
Illustration courtesy Oppenheimer
