Stephens Says The Street Is 'Too Optimistic' On Dick's Sporting Goods

Dick's Sporting Goods Inc DKS deserves credit for succeeding in multiple initiatives over the years, but analysts are "too optimistic" on the sporting good's outlook, according to Stephens.

The Analyst: Daniel Imbro initiated coverage of Dick's Sporting Goods with an Underweight rating and $45 price target.

The Thesis: Dick's Sporting Goods is the largest sporting goods retailer with a national presence and management did a good job over the years in generating superior scale advantages, overseeing better purchasing capabilities, creating compelling omni-capabilities along with its physical infrastructure.

Prior to the COVID-19 pandemic, Imbro said the sporting good market stood at $70 billion and is now expected to grow at a mid-single growth rate over the coming five years.

However, data from foot traffic analytics firm Placer.ai suggests ongoing traffic concerns at stores due to warmer weather and rising COVID-19 cases across the U.S. Digital data from Apptopia also point to a sequential moderation in mobile app traffic growth.

While the company can see a rebound in 2021 and Dick's should be able to show positive comps for the year, according to the analyst. But the "most important driver of profitability" is merchandise margin and several tailwinds in 2020 are unlikely to sustain in 2021 and beyond.

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For example, the company was able to generate sales through fewer promotions in 2020 due to strong COVID-19 trends like a focus on fitness and wellness. As sales slow down in 2021, the promotional activity will increase while smaller rivals that are "doing well" now will look to take market share from major players like Dick's Sporting Goods.

Another headwind to margins in 2021 is expectations for increased transportation costs from driver shortages and expectations for higher shipping costs from partners like FedEx.

"Net, we believe that gross margins will be up from 2019 levels, but not to the extent that consensus currently has modeled," the analyst wrote in the note.

DKS Price Action: Shares of Dick's Sporting Goods traded up about 0.4% to $53.06 at publication time.

Photo by Mike Mozart via Wikimedia.