DICK'S Sporting (DKS) Up 17% In 3 Months: Will It Sustain?

DICK’S Sporting Goods Inc. (NYSE:DKS) stock displays momentum on the back of robust earnings trend despite headwinds related to hunt and electronics businesses. The company seems to be riding on the execution of strategies, strength in the core business, and improved e-commerce and private brand sales. Nevertheless, its dismal margins in the most recent quarter due to increased freight, shipping and fulfillment expenses cannot be ignored.

Notably, this Zacks Rank #3 (Hold) stock has improved 17.7% in the past three months, outperforming the industry ’s growth of 15%.

Let’s analyze the factors that are aiding the stock.

Hunt & Electronics Business Headwinds Subside

Troubles at hunting and electronics businesses have long been hurting DICK’S Sporting’s comparable store sales (comps) performance. The company has been putting in due efforts to offset these woes, which included the exit of the electronics business in fourth-quarter fiscal 2017. Additionally, it removed the hunting category from 10 DICK’S Sporting stores at the end of third-quarter fiscal 2018, which drove positive trends in these stores during the fiscal fourth quarter. Notably, these stores generated positive comps and strong margin growth in the fiscal fourth quarter.

Consequently, the company now plans to eliminate the hunting category from nearly 125 more stores (where the category is underperforming) in fiscal 2019. As previously done, this category will be replaced with more compelling assortment with growth potential. The company expects to start delivering positive comps from the second quarter of fiscal 2019 on the back of the execution of strategies and subsiding of headwinds related to hunt and electronics businesses. Consolidated comps for fiscal 2019 are projected to be flat to up 2% versus 3.1% increase in fiscal 2018.

Robust Outlook

In fiscal 2019, the company expects to invest in building the best omni-channel experience in sporting goods. Investments through the fiscal year will be focused on enhancing in-store experiences for athletes, improving e-commerce fulfillment capabilities, and developing technology solutions to boost athlete experience and employee productivity.

Backed by these growth plans and improved focus on digital and omni-channel growth, management provided an optimistic view for fiscal 2019. It anticipates earnings per share of $3.15-$3.35 compared with $3.24 reported in fiscal 2018.

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Omni-Channel & Merchandising Efforts

DICK’S Sporting has been gaining from continued focus on developing every possible way to generate greater sales. As part of its long-term plan, it plans to make significant investments in e-commerce, technology, store payroll, Team Sports HQ and private brands. Backed by its efforts to strengthen store network and expanding e-commerce presence, e-commerce sales grew 17% (excluding the calendar shift) in the fiscal fourth quarter. Moreover, e-commerce penetration improved to about 23% of net sales in the reported quarter, up from 19% in the prior-year quarter.

The company is also progressing well with the merchandising strategy (announced in fourth-quarter fiscal 2016), which is all about optimizing inventory to make shelves available for popular and private-label brands. Its efforts to improve in-store experience include the space reallocation to regionally relevant and growing categories, the rollout of HitTrax technology and batting cages in several stores, expansion of strike point presentations, and investment in product development teams.

In order to improve speed and reliability of online deliveries, the company is building two dedicated e-commerce fulfillment centers in New York and California, which will be operational in third-quarter fiscal 2019. The opening of these facilities will enable it to deliver the majority of online orders within two business days. These investments will not only improve customer satisfaction and inventory turnover but also boost merchandise margin rates.

What’s Hindering Performance?

Despite its merchandising efforts, DICK’S Sporting witnessed soft margins in fourth-quarter fiscal 2018. Notably, gross and operating margins for the fiscal fourth quarter contracted 168 basis points (bps) and 100 bps, respectively. The decline in margins is mostly attributed to a decrease of 37 bps in merchandise margin, higher occupancy costs, and increased freight, shipping and fulfillment expenses due to robust e-commerce growth. Meanwhile, SG&A expenses, as a percentage of sales, remained in line with the last year, at 22.2% as cost reductions more than offset investments and higher incentive compensation.

In fiscal 2019, the company’s gross margin is likely to be nearly flat to slightly down, owing to expectations of double-digit growth in e-commerce sales and expenses related to ongoing investments to improve fulfillment capabilities. Further, it projects operating margin to decline 20-40 bps, with SG&A deleverage due to continued investments in its business.

Wrapping Up

Although soft margins are concerning, we believe that the company has significant momentum left, driven by growth efforts and strong position in the market. This view is further supported by its impressive long-term earnings growth rate of 5.8% and a Zacks Investment Research