Dicks Sporting Goods Upgraded On 'Lone Survivor' Play

Retail is experiencing a huge sentiment shift amongst analysts after an encouraging holiday season at traditional brick-and-mortar stores.

After multiple years of challenging fundamentals and investor skepticism, Wells Fargo now sees a "somewhat favorable" setup for retail in 2018.

Although still acknowledging the high-level concerns that persist within the industry, Wells Fargo's Ike Boruchow said there are finally some legitimate reasons to own the space, something the bank has not said in two years.

The sporting goods and footwear retailers who suffered a brutal 2017, are seeing a rapid reversal in sentiment, leading Wells Fargo to upgrade Dicks Sporting Goods Inc DKS.

The Analyst

Wells Fargo's Ike Boruchow upgraded Dicks Sporting Goods from Market Perform to Outperform and raised the price target from $26 to $35.

The Thesis

With sporting good industry trends stabilizing, it appears the worst is over for Dicks Sporting Goods, Boruchow said. (See the analyst's track record here.)

Personal consumption expenditures in the sporting goods industry increased to 3.1 percent in the third quarter and surprisingly improved even more substantially at brick-and-mortar stores, the analyst said.

While Dicks shares shed nearly 43 percent over the last year, Boruchow said the company now has a "long-term survivor" opportunity that can withstand the disruption sporting goods retailers have faced over the past 18 months.

Dicks Sporting Goods was one of the first companies to provide an initial 2018 outlook and gave conservative guidance, including a statement that EPS could be down as much as 20 percent due to long-term investments and gross margin pressure — a prudent move, Boruchow said.

“While the outlook was somewhat shocking when first announced, the good news is that the factors pressuring 2018 should be well-understood at this point, with potential upside if trends improve."

Dicks is often compared to Best Buy Co Inc BBY, as the the lone survivor in an industry that was entirely disrupted by e-commerce, emerging as the dominant brick-and-mortar retailer in its space.

“We believe a similar opportunity exists for DKS, as the company can continue to capture market share from struggling brick-and-mortar competitors, which should drive sales/profit growth in the long-term,” Boruchow said.