Morgan Stanley Upgrades Dicks To Buy Following Improved Near-Term Setup

Dicks Sporting Goods Inc DKS reduced its 2016 guidance and announced conservative comp forecast for 2Q.

Morgan Stanley’s Simeon Gutman upgraded the rating for the company from Underweight to Equal-weight, while raising the price target from $39 to $43. The analyst commented that the presence of several late 2016 and early 2017 earnings tailwinds have positively skewed the risk/reward.

2016 Guidance

Dicks lowered its EPS guidance, projected a y/y decline of ~4 percent at the midpoint to $2.60- $2.90, citing flattish comps. The closing of stores by The Sports Authority would result in inventory being discounted and cleared out, which is likely to adversely impact Dicks’ sales in the near-term.

“This headwind should dissipate and eventually convert into a top-line tailwind as a large competitor (~$2.6 billion sales) exits the marketplace,” analyst Simeon Gutman noted.

2Q Comps

The company projected comps of -4 to -1 percent, which appears conservative, Gutman said. Comps in 1Q came in at +0.5 percent, suggesting that Dicks’ business was “weathering the choppy retail environment better than others.”

With a conservative comp guidance for 2Q, the company is likely to exceed expectations and this has historically boosted shares, the analyst stated.

Earnings Upside

Dicks is poised to benefit from investments in stores and marketing, as well as the internalizing of its ecommerce operations. These, and some other items, are expected to drive upside to earnings over the next 12 months, Gutman mentioned.