Deutsche Bank: 3 Reasons Why Dick's Sporting Goods Is A Buy

Dicks Sporting Goods Inc DKS landed another upgrade on Friday, in a positive sign for sports retail in 2018.

The Analyst

Deutsche Bank analyst Mike Baker upgraded Dicks Sporting Goods from Hold to Buy and raised the price target from $33 to $39.

The Thesis

"After several quarters of weakness, in part caused by fashion changes which saw a focus away from core athletic footwear products — where DKS is stronger compared to the lifestyle trends that came into vogue — we believe industry trends have stabilized," Baker said in a Friday note. (See the analyst's track record here.)

Deutsche Bank upgraded the retailer for three reasons, Baker said:

Industry trends are bottoming.
Inventory levels are coming back into balance with demand, lessening the impact on gross margins.
The risk to margin forecasts is reduced, as models already reflect increased investment spending.

Several indicators, both industry-related and from competitors and suppliers, support a more positive view of Dicks Sporting Goods, as retail sales are tracking up in the fourth quarter for the first time in six quarters, Baker said. Even more importantly, retailers with significant footwear exposure are seeing a 600-basis-point improvement in comps, he said.

“We believe much of the industry weakness over the past several quarters was driven by a glut of inventory that led to a supply and demand imbalance and thus lower margins," Baker said. “But, we believe that supply and demand are starting to move back in line.”

Dicks Sporting Goods, Hibbett Sports, Inc. HIBB, Foot Locker, Inc. FL and Finish Line Inc FINL all reported better sales growth than inventory growth in the third quarter.

Nike Inc NKE also indicated that inventories were coming back in line after reporting that closeout trends were not significant in the quarter and that product trends are healthier and improving.