Stephens initiated coverage on Dick’s Sporting Goods with an “Underweight” rating. In a note, Daniel Imbro, Stephens’ analyst, highlighted the retailer’s recent same-store momentum while expressing concerns over potential gross margin pressures.
“Management has made a number of positive investments in recent years improving fulfillment, E-commerce and customer experience all of which have driven comp sales strength which was further exacerbated by the pandemic,” wrote Imbro. He also said he expected the broader sporting goods industry to “remain on solid footing” and should benefit from the shift in consumer behavior during COVID-19. Strong trends in the golf category were particularly highlighted.
“However,” he added, “we believe the consensus is too optimistic on the gross margin outlook for 2021 as an inflationary freight backdrop, normalizing occupancy costs and normalizing promotional cadence should pressure margins. While the under-levered balance sheet does provide room for increased shareholder returns, we believe margin expectations need to reset before shares become more attractive.”
Imbro wrote that Dick’s year-to-date reduction in occupancy costs reflects improved rent negotiations that he believes are due to temporary rent forgiveness or abatement and “should normalize into a slight headwind in 2021.”
Merchandise margins have benefited from private label expansion and a less promotional environment overall due to strong demand for many of the industry’s products during the pandemic. However, Stephens expects promotions will heighten in 2021 as the industry’s sales slow and smaller competitors employ price to drive top-line growth.
Finally, Imbro believes driver shortages will continue to keep freight rates elevated. Parcel rates have also been inflationary through the back half of 2020. Imbro added, “The company has set up curbside pickup during COVID-19, which is limiting parcel expense, but we still believe this will be a headwind.”
Regarding recent top-line growth, Imbro said that based on foot traffic data from placer.ai, traffic at stores appears to have moderated during the quarter-to-date period as warm weather has impacted sales and COVID-19 cases have spiked around the country. A sequential moderation in mobile app traffic growth for Dick’s has also been seen, based on data from Apptopia.
Among the positives, the analyst cited Dick’s conservative balance sheet, experienced management team, and size as the country’s largest sporting goods chain. The analyst applauded the retailer’s strong launch of a curbside pickup service this year and believes it stands to benefit from its strong positioning around golf, including its Golf Galaxy stores. Also highlighted in the report was Dick’s success accelerating growth in the baseball category by adding HitTrax batting cages to about 170 stores. Likewise, the soccer and golf categories stand to benefit as experiential in-store elements to support those categories.
“Looking forward to 2021, we believe the company will be able to deliver positive comps for the year, driven by a very strong 1Q before comparisons get more difficult starting in 2Q,” said Imbro. “We think the investments into golf and soccer should support team sports revenue, in addition to the easy team sports comparisons from 2020. Partially offsetting these tailwinds, we do expect some of the hobby spending such as fitness to moderate.”
The analyst expects sales for 2021 to be in line with Wall Street’s consensus. On average, Wall Street is expecting Dick’s sales to reach $9.59 billion, up from $9.48 billion on average for the current year. Stephens expects earnings of $4.32 in 2021 and $5.66 for the current year, compared with $3.69 in 2019. Wall Street’s consensus is $5.09 for 2021 and $5.91 for 2020.
Stephens has a $45 price target on Dick’s. Shares of Dick’s closed Tuesday at $53.07. Shares are trading up slightly since opening the year at $49.49, although they had been in the teens in March as pandemic concerns first arrived.
