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Street Reacts To Dick's Sporting Goods Q4 Earnings, Stock Drop: Stay On The Sidelines

March 13, 2019 10:34 am
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Retailer Dicks Sporting Goods Inc (NYSE:DKS) on Tuesday morning reported fourth-quarter results that came in better than expected. Gross margins fell during the quarter and management offered concerning guidance for 2019.

Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

  • Canaccord Genuity's Camilo Lyon maintains a Hold rating on Dick's Sporting Goods with an unchanged $36 price target.
  • UBS' Michael Lasser maintains a Neutral rating with an unchanged $38 price target.
  • Wedbush's Christopher Svezia maintains at Neutral, price target lowered from $38 to $37.
  • Cowen's John Kernan maintains at Market Perform, price target lowered from $39 to $36.
  • Raymond James' Dan Wewer maintains at Market Perform, no price target.
  • Tigress Financial Partners' Ivan Feinseth.

Shares of Dick's Sporting Goods were trading higher by 2.2 percent at $35.36 Wednesday morning. The stock fell more than $4 per share in Tuesday's session.

Cramer: Management 'Dropped The Bomb'

Management "dropped the bomb" in its post-earnings conference call when it said further investments in the e-commerce business is needed, Jim Cramer said during his daily "Mad Money" show Tuesday. The company essentially told investors it needs to spend more money to create its own omni-channel presence, likely at the expense of gross margins.

Management said it will spend money on social media platforms to improve its digital marketing initiatives and gain new traffic to its websites. It also needs to start investing in new-age technologies like robotics to help lower shipping costs. Cramer said this creates somewhat of an identity crisis as the sporting goods retailer is "just supposed to be a company that knows sporting goods."

"They know baseball bats, Air Jordans, not robotics for heaven's sake,"Cramer said.

Canaccord: The Positives And Negatives

Lyons said on the positive side of the story:

  • Comps are guided to shift from -2.2 percent in the fourth quarter to positive territory in the second quarter;
  • Test stores where hunting products were removed saw a positive comp in the fourth quarter;
  • Expansion of batting cages to 150 stores
  • Innovation pipeline from apparel makers; and
  • An upcoming new private brand fitness product.

On the other hand, negative takeaways include:

  • Higher investments will impact 2019 earnings;
  • Expectations for negative comps in the first quarter
  • Transactions were lower by 3.1 percent in the fourth quarter;
  • Hunt category will decline in 2019; and
  • Accelerated e-commerce growth will impact gross margins.

UBS: Legit Plan?

Management presented the case for sales to improve in 2019 and the stock won't move higher until the plan proves to be legitimate, Lasser said in a research report. The company has multiple drivers for growth in 2019 and should be able to move past the hunt and electronics drags in the quarter.

If the company ends 2019 with flattish earnings compared to 2018, the market will focus on when EPS can shift to meaningful growth. The analyst said it's likely that more investments in the business will be needed beyond 2019 and management will need to show benefits from its investments in 2020 will offset continued investments.

Wedbush: Risks Remain

Dicks' second-quarter report will prove to be important as it could show an inflection in comps, Svezia said in a research report. Despite the guidance, there are multiple risks ahead that need to be addressed, some of which include elevated inventories, uncertain improvement in store traffic, tariffs and unclear demand for private label products.

Management's continued need to reinvest in the business without signs of sustainable positive comps and margin expansion ahead should keep investors on the sidelines, according to the analyst.

Cowen: A Look At Free Cash Flow

Dicks' free cash flow should be maintained at around $300 million through fiscal 2022, which Kernan said is large enough to support cash returns to investors. Specifically, investors can expect $847 million in cumulative share buybacks through fiscal 2022 and a 10 percent compounded annual growth rate in dividend payments.

Raymond James: Margin Expansion 'Difficult' To Justify

Dicks' eliminated the electronics and hunting categories from stores and this move contributed around 3 percentage points of the 2.2 percent same-store sales decline seen in the quarter, Wewer said in a research report. The pressure should subside in the second quarter, but the company is likely to end the year with flattish same-store sales growth and square foot growth of just 1 percent.

These assumptions make it "difficult" to justify an expansion in the stock's multiple.

Tigress: Buy The Dip

Investors should consider being buyers of the stock as its business will continue benefiting from strong sales within athletic apparel and footwear categories, Feinseth said in his daily newsletter. Management's decision to introduce its own in-house brand implies it will be less reliance on wholesale partners.

The analyst says he sees upside potential for Dicks' stock move higher to the low $40 level and is backed by a dividend yield of 3.18 percent.

Photo by Mike Mozart/Wikimedia.

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