Dick’s Sporting Goods In The Rough ?

DKS : NYSE : US$44.21 HOLD 
Target: US$49.00

Consumer & Retail — Footwear and Apparel
WORKING THROUGH STIFF HEADWINDS,

Investment recommendation
DKS reported Q2 EPS of 67c. vs. our estimate and consensus of 65c,
driven by stronger-than-expected comp growth of 3.2%, tighter expense
controls and a lower share count, partially offset by gross margin
contraction as steep promotions in golf drove traffic at the expense of
margins. The hunting category continues to experience challenges as it
comp’d -HSD in 2Q14.
That said, growth in other outdoor categories is
offsetting the weakness in guns/ammo, which drove flat total category
comps. The company provided EPS guidance of $0.38-$0.42 for 3Q14,
including a -2c impact due to higher SG&A expense related to 32 new
store openings in the third quarter.
Investment highlights
 DKS has taken meaningful steps to mitigate the impact of the
struggling golf business, but the promotional activity is expected to
continue into 2H. Also, generally high promotional activity across
the industry will impact DKS by an estimated 4c in 2H14 as it will
need to keep the promotional pace with its competitors to drive
traffic. Lastly, hunting is expected to offsetDKS is benefitting from its move to reduce sq ft in golf and increase
the space in Women’s & Youth apparel. We would like to see an
incremental reduction in golf sq ft.; however, the company is being
methodical about the space shifts and resulting cost/benefits.
Valuation
Our $49 target is a blend of 15x 2015E EPS, 8x EBITDA, and DCF the growth in other
outdoor categories in the near term.

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