Shares of Dick’s Sporting Goods barely budged on Tuesday despite the retailer reporting third-quarter results that nearly doubled Wall Street’s targets on accelerating same-store growth and also announcing that Lauren Hobart would be succeeding long-time CEO Ed Stack. Wall Street was nonetheless impressed by the performance with some gaining more confidence in Dick’s growth prospects for 2021.
Highlights of the Q3 report include:
- EPS on an adjusted basis reached $2.01 versus consensus estimates of $1.05;
- Net sales climbed 22.9 percent to $2.41 billion, surpassing Wall Street’s consensus target of $2.23 billion;
- Same-store sales grew a quarterly record 23.2 percent, accelerating from a 20.7 percent gain from the second quarter and tracking significantly higher than the Street’s 13.8 percent estimate;
- Brick & mortar comps were ahead double-digits;
- Online sales vaulted 95 percent, representing 21 percent of total sales compared to 13 percent a year ago;
- Stores drove 90 percent of total Q3 sales growth as stores fulfilled 70 percent of online sales, and curbside and in-store pickup (BOPIS) sales increased more than 300 percent;
- The top-line gains were driven by continued strength in consumer demand for golf, outdoor and home fitness products;
- Private label comps are estimate to have increased over 33 percent;
- Gross margins improved 533 basis points 34.9 percent. The improvement was boosted by merchandise margin expansion of 277 basis points driven by fewer promotions;
- Through the weekend ended November 2, comps had increased in the high-teens as the favorable trends seen in the third quarter continued but were partially offset by the impact of warmer weather on cold-weather categories.
Dick’s announced that Ed Stack, CEO since 1984, will be succeeded by Lauren Hobart, the retailer’s president, effective February 1, 2021. Stack will assume the role of executive chairman to continue his responsibilities as chief merchant and overseeing strategic growth initiatives.
Hobart joined Dick’s from Pepsico in 2011 as SVP and chief marketing officer, assumed the role of president in 2017, and has guided many of the chain’s newer initiatives in recent years.
Shares of Dick’s added 18 cents Tuesday to $58.99 but have seen a significant recovery in recent months. The stock had traded as low as $13.46 in mid-March as the pandemic emerged and began the year at $49.49.
The following is a synopsis of some analyst views on the quarter and the leadership transition.
›UBS, which has a “Neutral” rating on Dick’s, raised its price target to $64 from $61.
Wrote Michael Lasser, UBS’ lead analyst in a note, “Coming out of the pandemic, DKS should be in a better position than it was in heading in. It’s pivoted quickly, adjusted and reacted. This has enabled it to capture its fair share of the strong industry demand over the last several months.”
Lasser highlighted that same-store sales trends accelerated over the quarter as a disrupted learning environment likely pushed some back-to-school sales from August into September and October. Further, Lasser was assured by the high-teens comp growth so far in the fourth quarter despite the softness in cold-weather categories. Lasser believes core categories are still comping in-line with the third quarter’s pace.
Lasser concluded, “At this point, the debate has increasingly shifted to 2021/2022 and understanding how the retailer is set to lap this period of strength. With the stock trading in-line with its 5-yr avg of 13x NTM PE, we do not think the market is pricing in any step function change in DKS’ long-term potential as a result of the gains from this year. If the co. can deftly navigate a less favorable environment where demand has been pulled forward and promotions return to normalized levels, its shares could be rewarded with a higher multiple.”
›Bank of America Securities retained its “Buy” rating on Dick’s and lifted its price target to $80 from $70.
Bank of America’s fourth-quarter EPS on Dick’s was increased to $1.70 from $1.29 given the better-than-expected quarter-to-date same-store sales trends despite warm weather headwinds, wrote Robby Ohmes, Bank of America’s lead analyst in a note. The investment firm’s same-store sales estimate of 15 percent in the fourth quarter assumes some deceleration as Dick’s closure on Thanksgiving this year versus being open last year is seen as “a material headwind” to comps. On the positive side, offsets include the potential benefit from two more shopping days between Black Friday and Christmas and the December-15 cut-off deadline for ground shipments from UPS and FedEx that could boost Dick’s in-store pick-up business afterward. The earnings outlook also assumes less significant gross margin expansion versus the third quarter given higher online penetration and shipping surcharges.
For 2021, Ohmes expects a recovery in the team sports category as sports likely return should support same-store sales. He noted that about half of states delayed high school leagues until spring. Ohmes also sees “multiple gross margin drivers,” including moves by Nike and Under Armour to reduce distribution to more value-oriented retailers that could lessen the overall promotional environment in the athletic space. Other margin drivers are expected to be continued private-label expansion, the exit of lower-margin categories such as hunt, and improved profitability online with the expansion of store pickup and ship-from-store.
›Morgan Stanley continued its “Overweight” rating at a $65 price target.
Simeon Gutman, the lead analyst at Morgan Stanley, wondered if Dick’s sales upside would be more sustainable than many expect. He noted that Dick’s comp gain of 23.2 percent is among the highest across Morgan Stanley’s coverage and supported by double-digit in-store comps. He also noted that Dick’s appears to be benefiting from strengthening relationships with key vendors like Nike and the traction gained by its private label brands.
Gutman wrote, “While sales growth is expected to, and should, moderate across retail categories once consumer spending on services/experiences eventually rises, we think DKS’ sales momentum could level out at a higher level than many, including us, expect. This is because inflated spending in other categories is mainly product-based, for example, home furnishings, whereas spending at DKS is often tied to changing habits, greater emphasis on health/fitness, that may create more sustainable demand.”
Gutman also noted that underlying margin improvement continues with the benefit of improved online profitability and the analyst also called out Dick’s strong balance sheet. The analyst also doesn’t expect any major changes in Dick’s strategy as a result of the leadership change. Gutman wrote that Hobard “has been with the company for around ten years and has been an instrumental part of its growth over this time. We do not expect any significant changes to the company’s strategy as a result of the leadership transition”
›Credit Suisse kept its “Neutral” rating on Dick’s and raised its price target to $69 from $65.
“We came away from Dick’s Q3 generally constructive, although we balance that with what now seems to be much higher expectations for both Q4 and FY21,” wrote Seth Sigman, Credit Suisse’s lead analyst, in a note.
Sigman noted that the comp gain of 23.2 percent marked an acceleration from the 11 percent pace in the first three weeks of the quarter, implying comp gains of 27 percent in the last 10 weeks. The gains were supported by an improvement in back-to-school trends and the continuation of strength in the golf, fitness and outdoor categories. He noted the growth rate had slowed to the high-teens quarter-to-date in the fourth quarter due to reduced sales of cold-weather items, other parts of the business remain relatively strong. He noted that Dick’s officials pointed to potential offsets with the continuation of strong trends in the golf business. The team sports category should benefit from pent-up demand in spring 2021 assuming play resumes.
Wrote Sigman, “Diversity of category drivers should help navigate in a pandemic “recovery”; we model comps down slightly in FY21 but that could be conservative as the sporting goods category could hold up better, on average, than some other at-home categories.”
›Goldman Sachs reiterated its “Buy” rating and lifted its price target to $74.
Wrote Kate McShane, lead analyst for Goldman Sachs, “We increasingly believe that Dick’s Sporting Goods will be able to grow comps in 2021 over already unprecedented comp strength in 2020 based on 1) continued strong athletic trends (that were present before the pandemic), 2) a likelihood of sustainability of category growth that was rediscovered during the pandemic (like golf and biking), 3) improved in-stocks (bicycles and fitness equipment), 4) a strong relationship with Nike, which continues to drive more innovation and newness to DKS as they refine their retail distribution, and 5) easy compares as the company laps closed stores in Q1 and depressed team sports in Q1 (baseball) and Q3 (football).”
On the leadership changes, McShane wrote, “While a big change for the company (Mr. Stack has led the company since 1984), Ms. Hobart, who also held the position of Chief Marketing Officer, and has been with the company since 2011, has been integral to building out the company’s successful omnichannel strategy and leading the company through the pandemic. Mr. Stack continuing on as Chief Merchant and overseeing the company’s strategies will help with a smooth transition.”
›Stifel kept its “Hold” rating at a $62 price target.
“The strong 3Q led by eCommerce and omnichannel capabilities such as curbside/in-store pickup is an apt backdrop for the CEO transition to President Lauren Hobart who has been instrumental in the omnichannel evolution,” wrote Jim Duffy’s, Stifel’s lead analyst in the space in a note. “Importantly, Mr. Stack, who has been the heartbeat as CEO since 1984, will remain actively involved as Chief Merchant.”
Duffy noted that third-quarter growth was again led by average ticket, up 19.6 percent, which Stifel doesn’t expect will be sustainable next year. Wrote Duffy, “With difficult comps ahead, we expect resulting deleverage but believe much of the margin improvement in FY21 will prove durable and we have a more clear picture of sustainable structural margins. We have raised estimates for FY20 and FY21 and are introducing estimates for FY22. Mindful of uniquely difficult comps in 2021, we are maintaining our Hold rating and $62 target price.”
›Susquehanna Financial Group kept its “Positive” rating on Dick’s and raised its price target from $72.00 to $74.00.
Sam Poser, Susquehanna’s lead analyst in the space, wrote in a note, “Best-in-class omnichannel capabilities enhanced by improving CRM capabilities drove a humongous 3Q20 beat, is driving the high-teens 4Q QTD SSS, (quarter-to-date, same-store sales), and should continue to create customer loyalty. A new base for the digital business has been created, as new shoppers at Dick’s Sporting Goods should become regular customers going forward into FY21 and beyond. 4Q20 trends will improve as comparisons, due to weather, ease in December.”
On the leadership change, Poser stated, “We believe the transition is a logical one, as significant improvements, particularly in customer engagement, have been made during Ms. Hobart’s tenure as President.”
›Wells Fargo reiterated its “Equal Weight’ rating on Dick’s while raising its price target to $58 from $53.
Tom Nikic, the lead analyst on the stock at Wells Fargo, cited among favorable developments the acceleration of comp growth in September and October, the double-digit comp growth seen by stores and their omnichannel support, and the expansion of private label brands that provide both a differential and margin benefit.
He also noted that Dick’s said it added nearly 2 million new customers in the quarter. Dick’s officials indicated sales from new customers increased over 70 percent compared to last year and new customers skewed more female and younger. Wrote Nikic, “We think this bodes well for DKS, particularly as we view the female athlete as a traditionally underserved demographic in the athletic industry broadly.”
The big challenges for the stock, according to Nikic, will be concerns over anniversarying the 20 percent-plus comp gains in 2021’s second and third quarter as well as a likely investor focus on recovery stocks. Wrote Nikic, “DKS is executing very well, in our opinion, and demand for sporting goods is extremely strong. However, with the recent announcement of multiple COVID vaccines, we believe that investors will increasingly focus on “recovery” stories for 2021 – while fretting about businesses that saw surges in demand during the pandemic (explaining why DKS shares aren’t being rewarded for the strong Q3 print).”
Photo courtesy Dicks Sporting Goods