Dick’s Sporting Goods UPDATE

DKS : NYSE : US$43.60

HOLD 
Target: US$49.00

Consumer & Retail — Footwear and Apparel
STEPPING TO SIDELINES AS GOLF WILL TAKE TIME TO BOTTOM OUT;
DOWNGRADING TO HOLD, $49 Target Price
Investment recommendation
On the back of disappointing Q1 results (1.5% comp/50c in EPS vs. our
4%/54c estimate) coupled with its reduced 2014 outlook, we are
downgrading DKS to HOLD from Buy and lowering our price target to
$49 from $67. The Q1 issues driven by poor performance in golf (-HSD)
and hunting (guns/ammo) are expected to persist through year end.
Moreover, current Q2 trends have continued to soften as golf is comping
down low teens while hunting is down high teens, resulting in a ~4.5%
comp headwind. Hunting faces tough but easing comparisons through
year end. DKS believes golf clearance activity will be confined to Q2, yet
we are less optimistic and believe markdowns could spill into 2H14.
What’s more troubling is the lack of visibility in golf and when it will
bottom out. While the 18% decline in the stock appears excessive, we
believe it will take time for DKS to recover its comp momentum, and
thus believe the shares will trade sideways until we see evidence of
stabilizing golf and hunting trends.
Investment highlights
 To combat negative traffic, the company will increase its
promotional cadence and advertising. As a result, Q2 guidance (62-
67c vs. our prior 83c est.) came in dramatically below our estimates.
On the positive side, athletic apparel/footwear and team sports did
well as the rest of the store comp’d up 6.6%.
Valuation
Our $49 target is a blend of 15x 2015E EPS, 8x EBITDA, and DCF

CLUBBED BY GOLF: DOWNGRADING TO HOLD
We are downgrading DKS to HOLD from BUY. While DKS is a best-in-class retailer, we
believe there are both structural headwinds the company faces in golf and cyclical
headwinds in hunting (guns/ammo) that will result in depressed comps for the balance of
the year, mitigating the strength of other categories such as athletic footwear and apparel.
As such, we believe it is prudent to step to the sidelines as right-sizing these
underperforming categories will take time, particularly as DKS works through excess golf
inventory and demand resumes. Our price target goes to $49 from $67.
In search for a bottom in golf
The issues with the golf category (~15% of the business) are two-fold. First, the
combination of persistently cold weather in Q1 coupled with a glut of inventory in the
channel depressed replacement purchases in Q1. As with any category in which there is a
build-up of excess inventory, DKS has begun discounting and believes it can work through
the excesses in Q2. That, however, is creating incremental pressure on pricing (AUR was
-16% in Q1 and units were -2%) as the discounting of older inventory is skewing demand
toward older inventory at the expense of newer technologies. Management suggested the
consumer does not understand the technological benefits the new clubs have. While that
might be true to some extent, we believe the customer is more heavily skewed by price. We
expect this negative cycle to persist through year end as inventory issues (and potential
margin pressures) always take longer to clear out than initially believed.
Second, structural concerns around the decline in rounds played are also troubling given
the sq. ft. allocated to the category (~8% of store sq. ft.). What’s more disconcerting is that
management does not know where the bottom in golf is. While we appreciate the candor, it
is nonetheless troubling to hear. To date, DKS remains committed to the golf category but
is actively reducing the sq. ft. allocated to it in-store in favor of women’s and youth
apparel. We support this decision; however, it may not be enough to fully offset the
declines.
Hunting facing a year of tough comps
Hunting, and more specifically guns/ammo (~15% of business), is facing difficult
comparisons this year due to the acceleration in purchases over the last couple of years
that were driven by fears of potential legislative changes to gun ownership laws. While this
appears to be more of a cyclical issue than anything else, it remains a headwind for the
balance of the year.
2017 goals likely get pushed out one year or more

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