EUR 850.00 For Business Accounts Only

Morningstar | Fair Start to 2019 for No-Moat Dick’s Sporting Goods, but Traffic a Concern; Shares Undervalued

No-moat Dick’s Sporting Goods matched our $0.61 EPS forecast for the first quarter. Flat same-store sales beat our forecast of a 1.3% decline, but adjusted selling, general, and administrative expense of 25.3% of sales was 70 basis points higher than we anticipated. Elevated expenses were partially due to initiatives to improve digital offerings and customer service. Although Dick’s has taken some costs out of the business, its operating margins have been steadily declining since 2012. Given the competitive landscape, we do not think it can approach the operating margins above 8% that it reported in 2011-14. We forecast no significant improvement in operating margins over the next decade from our 2019 forecast of 5%.

We think Dick’s will continue to invest heavily in e-commerce and advertising to improve brand awareness. While e-commerce is a bright spot (15% growth in the first quarter), fulfillment costs will continue to drag on profitability. Management slightly (by $0.05 on top and bottom) raised its 2019 EPS guidance to $3.20-$3.40, but the change appears to be primarily related to a reduced share count. As our full-year forecast is in line with Dick’s 2019 guidance same-store sales of flat to 2%, we do not expect to change our $43 fair value estimate and continue to view the shares as undervalued.

We remain concerned about weak traffic in Dick’s stores. Traditional sporting goods stores are losing sales to other retailers and direct-to-consumer efforts by vendors. No-moat Kohl’s, for example, has announced expanded shelf space for athletic apparel. Dick’s transactions have dropped in five of the past eight years and were down again (by 1%) in 2019’s first quarter. While Dick’s has slowed its store expansion (fewer than 10 net new stores in 2019), it remains dependent on its more than 850 physical stores. Despite e-commerce growth, we forecast Dick’s physical stores will produce 87% of its 2019 sales.

Dick’s is making some merchandising changes to improve profitability. We estimate private-label merchandise will constitute 16% of total sales in 2019, up from 10% in 2015. We believe private-label apparel has good gross margins, but price points are relatively low. Dick’s is also swapping out its weak hunting gear in favor of better selling activewear in 125 more stores. Dick’s has reported positive results in 10 stores in which it made this change late last year. However, hunting remains a large category in most Dick’s stores, and the fate of its Field & Stream chain remains uncertain. While we think Field & Stream is cash flow positive on its own, we do not think it has a positive growth profile, as hunting is in decline.

The effect of tariffs on imports from China remains uncertain. Dick’s has reported minimal impact from tariffs so far. Expanded tariffs, though, could affect many of Dick’s key categories, including hardlines (such as sports equipment and hunting gear), apparel, footwear, and outdoor furniture. Dick’s has not explicitly included tariffs in its 2019 guidance. However, we think that its relatively conservative outlook is based partly on the elevated risk.