Morningstar | Dick's 2019 Guidance Raises Questions, but Experience, Operational Investments Set It Up for Growth
No-moat Dick's fourth-quarter results came in slightly better than expected (down 2.2% comps versus expectations of down 3.4%, e-commerce sales up 17%, EPS of $1.07 versus an implied of range of $0.97-$1.07), but its initial 2019 outlook appears to be weighing on the stock. We aren't concerned about guidance of 0%-2% comps in 2019 (and a return to positive comp growth in the second quarter), as it suggests that the rotation away from hunting/firearm categories (which affected fourth-quarter comps by 3 points) to private-label and specialized/experiential categories like baseball/HitTrax are on track. However, 2019 EPS guidance of $3.15-$3.35 (versus market expectations of $3.35 and including $0.23 for "transformation initiatives") warrants examination.Management outlined three priorities for 2019: in-store experience/employee training; e-commerce fulfillment speed; and website and store operational technologies. In total, Dick's expects to spend $60 million ($35 million experience, $15 million e-commerce, $10 million technology) on these priorities, partly offset by $30 million in supply chain/rent cost cuts. While we appreciate concerns about these investments being one-time or ongoing, we expect moderation beyond 2019, resulting in a more streamlined in-store/online sales process and improved operating leverage.
We're not planning changes to $40 fair value estimate, as 2019 investments will offset time value of money adjustments. We plan to align our model with Dick's 2019 outlook, with our model calling for 0.5% comps, flat to a modest decline in gross margins (versus 28.9% in 2018), and the upper half of its EPS range. However, we still see our 2019-28 outlook calling for average annual sales growth of 2.2% and average operating margins of 5.7% as achievable. We see shares as modestly undervalued and believe the top- and bottom-line benefits of Dick's business transformation initiatives will become more apparent as 2019 progresses.
Dick's Sporting Goods is an omni-channel sporting goods retailer offering sports equipment, apparel, footwear and accessories. The company also owns and operates Golf Galaxy, Field & Stream and other specialty concept stores, and Dick's Team Sports HQ, an all-in-one youth sports digital platform offering scheduling, communications and live scorekeeping through its GameChanger mobile apps, free league management services, custom uniforms and fan wear, and access to donations and sponsorships. The company provides products to its customers through its retail stores and online. The company is also involved in local communities, sponsoring teams in various sports.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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