By Thomas J. Ryan
<span style="color: #a6a6a6;">Shares of Dick’s Sporting Goods jumped 16 percent on Wednesday after the retailer reported record earnings and sales for the second quarter as many sporting goods and outdoor products are finding new appeal amid the stay-at-home economy. A number of Wall Street analysts see Dick’s building on its renewed momentum in the quarters ahead but a few were skeptical about how COVID-19 trends would shake out in 2021.
Among the highlights of Dick’s Q220 report:
- Same-store sales grew 20.7 percent in the quarter, exceeding Wall Street’s consensus estimate of a 10.5 percent gain;
- Adjusted EPS rose more than 150 percent to $3.21, easily topping the consensus target of $1.26;
- Gross margins expanded 450 basis points to 34.5 percent;
- E-commerce sales vaulted 194 percent year-over-year, representing 30 percent of sales versus 12 percent in 2Q19;
- Through the first three weeks of the third quarter, comp sales were tracking up 11 percent (down from an estimated positive 30 percent in the months of June and July), reflecting continued strong underlying sales that offset weakness in core back-to-school products and team sports sales. Dick’s officials suggested a potential topline re-acceleration as Q3 progresses; and
- Inventory decreased 12 percent year-over-year. Dick’s officials said challenges catching up with hot categories could limit 3Q revenue and earnings gains.
Shares of Dick’s rose Wednesday by $7.32, or 15.7 percent, to $53.99 on the New York Stock Exchange. Shares had closed as low as $16.43 on March 18 as COVID-19 emerged before seeing a strong recovery.
›Morgan Stanley upgraded its rating on Dick’s to “Overweight” and hiked its price target to $65 from $40.
Analyst Simeon Gutman wrote in a note, “Our upgrade reflects three factors. First, we now see earnings upside over the next two years driven by gross margin expansion and significant shareholder returns (share repurchases). Our new 2021/22 EPS estimates sit 10 percent and 30 percent above consensus. Second, we are more confident in sustainable gross margin expansion due to 1) merchandise margin tailwinds such as greater private label penetration and category resets and 2) improving e-commerce profitability from lower variable fulfillment costs. Third, risk/reward is skewed positively as our base case assumes a 12.5 P/E multiple, in line with historical levels, while there could be significant upside in our bull case if the stock gets re-rated similar to other retail category killers. Even if the current period of strength is temporary and margins contract going forward, 2022 EPS is likely no worse than 2019 given DKS’ status as a category leader, insulating the stock’s potential downside.”
The price target hike was mainly due to its higher estimates. Gutman noted that while there’s a risk that Dick’s record performance “may get lumped in with retailers temporarily doing well in this environment” by investors, emerging tailwinds to gross margins were appearing before, and will be enhanced by, COVID-19 and “we don’t think the stock is pricing in ongoing EPS upside at its current valuation.”
›Oppenheimer & Co. lowered its rating on Dick’s to “Perform” from “Outperform” while modestly lifting its price target to $56 from $52.
Brian Nagel, Oppenheimer’s analyst in the space, noted that in early June, the investment firm upgraded Dick’s based upon a discounted valuation and Oppenheimer’s view that the chain was well-positioned to navigate COVID-19-related headwinds and capitalize upon shifts in consumer spending patterns in the near term.
The analyst noted that the stock is now ahead nearly 220 percent since reaching a 52-week low in March, trading well ahead of broader market averages.
Nagel further wrote that despite the significant strengthening in trends at Dick’s in the second quarter through August, Oppenheimer remains concerned with underlying limitations in Dick’s business model “and sporting goods sector broadly, namely waning interest in once-key categories and heightened focuses on the part of leading brands toward the benefits of direct-to-consumer distribution.”
The analyst wrote, “While we admire the efforts of management to thrive amid consumer sector upheaval, we look upon stronger sales and earnings lately as largely shorter-term in nature and are hard-pressed to envision the market awarding shares a meaningfully higher multiple.”
›Goldman Sachs reiterated its “Buy” rating and lifted its 12-month price target to $60 from $50.
Lead analyst Kate McShane wrote in a note that demand remained strong into August with the 11 percent quarter-to-date comps and headwinds from back-to-school, and team sports should lessen as the quarter progresses. She wrote, “Athletic apparel/footwear, fitness, outdoor, and golf continue to perform very well and further progress on replenishing high-demand inventory should help support top-line growth.”
Looking ahead, McShane said that while social-distance/shelter-in-place driven demand may be unlikely to repeat, “the setup for 2021 still appears favorable” with Dick’s facing easy comparisons early in the year against the temporary store closures and likely benefiting from a return to a normal back-to-school and summer/fall team sports season.
She wrote, “We continue to have a positive outlook for DKS given its: 1) competitive positioning within athletic/sporting goods; 2) its ability to capitalize on shifts in leisure time and spend to active, outdoor and socially distant activities; and 3) a reasonable valuation.”
Goldman Sachs increased its 2020/21 EPS estimates and adjusted its price target higher on the higher EPS estimate and market multiple expansion. Wrote McShane, “In our view, the potential for growth in 2021 puts DKS in a unique spot versus many retailers under our coverage who have benefited from COVID-19-related activity (and may have difficulty comping it next year)”.
›Cowen reiterated its “Outperform” rating and raised its price target to $68 from $54.
John Kernan, the lead analyst, wrote in a note, “The business is clearly gaining the loyalty of both consumers and importantly key vendors with better alignment of e-commerce fulfillment and in-store operations following years of investments (75 percent of e-com was fulfilled through stores in Q2). Omni-channel initiatives continue to support comps despite weaker macro around back-to-school which sets up easy compares in FY21.”
He called out the 11 percent comp growth in the third quarter to date that also saw continued margin rate expansion and came despite conservative planning, a softer back-to-school period, lack of team sports and chasing in-stock in certain hot categories. Kernan wrote, “Private label performance across multiple categories, including apparel, along with improved vendor partner allocations, should remain margin tailwinds through 2H and into FY21.”
>UBS maintained its “Neutral” rating with a $56 price target.
Analyst Michael Lasser believes comp growth may accelerate as the third quarter progresses as Dick’s officials indicated inventory constraints will be easing late September. He also noted that much of the headwinds from the soft back-to-school selling season will be behind Dick’s in the September and October. He added that while cold weather will likely drive consumers inside, Dick’s “regional exposure to warm areas & a desire for socially distant forms of entertainment will continue to benefit” the second half overall.
For 2021, however, UBS is predicting largely flat comps for Dick’s. Lasser wrote, “DKS, like many retailers, faces a tough compare next year as it laps elevated comps. Further, in a normalizing environment we may see some regression in wallet share shifts. While some of the new hobbies gained during social distancing may prove sticky, we think DKS will primarily benefit from a tradeoff of these categories of recent strength (such as biking and fitness) to a return of team sports.”
> D.A. Davidson reaffirmed its “Buy” rating on Dick’s and raised its target price to $67 from $57.
Analyst Michael Baker noted that Dick’s and Best Buy had similar quarters but shares of Dick’s rose and Best Buy fell on the reports. The reverse reaction, he believes, reflected Dick’s success raising gross margins by 450 basis points. Baker wrote in a note, “In fact, we believe that this was the biggest positive surprise in DKS results, along with commentary suggesting that there was not much back half markdown risk. The fear for DKS was that there was a glut of inventory in the channel and that this would lead to lower gross margins in 2Q and 2H20. But, it seems that vendors have held back on inventory, leading to clean inventory in the channel.”
Baker said he continues to recommend Dick’s and Best Buy as “both are well positioned for the “stay, play, earn and learn” from home trade.”
> Stifel continues to carry a “Hold” rating on Dick’s while significantly raising its price target to $62 from $34.
Lead analyst Jim Duffy wrote in a note, “DKS reported a standout 2Q and more than $1bn in cash flow from ops strengthened the balance sheet.” Looking to FY21, he believes demand for big-ticket categories will likely prove difficult to comp “but that some of the COVID-19 inspired category participation and behavioral changes will endure (home fitness, active/casual fashion, etc.) and some of the related expenses will ease.”
He called out the expansion of curbside pick-up and BOPIS among the margin drivers while significantly raising his EPS estimates for 2020 and 2021. Duffy concluded on the stock’s valuation, “The improved balance sheet in combination with normalized cash generation capacity of 10 percent or more of the equity value improves our view of appropriate multiple.”
Photo courtesy DKS