Believing the retailer’s fourth-quarter results should surprise on the upside given management’s conservative guidance and the benefits of cold weather, Susquehanna Financial Group raised its rating on Dick’s Sporting Goods to “Positive” from “Neutral.”
Susquehanna’s price target was increased from $25.00 to $41.00. Shares of Dick’s closed Tuesday at $34.95, up 33 cents.
In a note to clients, Sam Poser, the lead analyst, said proprietary checks and industry reads indicate that Dick’s near-term, same-store sales “while still poor, are improving.” The gains primarily stem from cold weather lifting apparel, outerwear, accessories and footwear sales. The investment boutique also cited the increasing probability of “less worse” results as helping Dick’s beat its guidance for the fourth quarter as well as 2018.
Due to expectations that it will have to remain promotional in an overall promotional climate, Dick’s had predicted that its EPS could drop “as much as 20 percent” for its year ending January 2019.
As a result of the improving sales, Susquehanna increased its Q417 same-store estimate from negative 2.1 percent to negative 1.2 percent versus the consensus call of negative 1.4 percent. Also reflecting the lower tax rate, the EPS estimate increased from $1.16 to $1.24 versus guidance of $1.12 to $1.24 and consensus of $1.19.
EPS estimates for FY18 and FY19 climbed from $2.34 and $2.73 to $2.94 and $3.37, respectively, due to better expectations for same-store sales and less margin pressure from promotions than initially anticipated. The new FY18 EPS represents a four-percent decrease versus the consensus decrease of nine percent and management’s guidance call for a decline of “as much as” 20 percent.
Poser wrote that inventories levels at the close of the third quarter weren’t excessive for Dick’s and “relatively healthy inventory levels coupled with better cold-weather product demand trends should lead to less gross margin pressure than originally anticipated.”
Poser noted that the Street and his own firm had over-estimated Dick’s ability to “withstand pressures” from excess inventory/liquidations in the marketplace due to a number of bankruptcies over the last two to three years, as well as from “poor distribution decisions” by its key vendor, Under Armour. While Dick’s hasn’t yet seen a sharp uptick in market share as a result of those competitor exits, “a combination of easing market disruptions and improving near-term demand could provide DKS with the perfect opportunity to move away from the ‘slippery promotional slope’ the company embarked on in 2017.”
Moreover, the analyst said that much like what Best Buy has been able to capitalize on in the consumer electronics space, Dick’s could benefit from winding up as the “lone survivor” as major competitors exit the sporting goods channel. Poser added, “If a silver lining can be found in DKS’ price aggression, it is that DKS appears to be ‘turning the screws’ on Academy Sports in Academy’s core TX market, potentially knocking off yet another competitor.”
Poser still wrote that the long-term outlook for Dick’s remains “unclear.” He feels Dick’s should be reinforcing its position as the industry’s premium retailer by focusing on improving the customer experience and assortment, but those efforts are being undermined by its promotional focus. Wrote Poser, “Unfortunately, promotional activity elicits very little customer loyalty (and in fact conditions customers to only buy on a deal), and a constantly improving customer experience/assortment have become table stakes for retailers.”
Photo courtesy Dick’s Sporting Goods
