On Oct 4, 2013, we downgraded sporting goods retailer, DICK’s Sporting Goods Inc. (DKS), to Underperform based on lower-than-expected bottom-line results in two of the last three quarters.
Why the Downgrade?
Estimates for DICK’s Sporting, the mid-cap retailer specializing in sporting goods, have been declining since it reported second-quarter results on Aug 20. DICK’s Sporting’s second-quarter fiscal 2013 earnings of 71 cents per share fell short of the company’s guidance as well as the Zacks Consensus Estimate of 74 cents.
Following the release of second-quarter results, the Zacks Consensus Estimate for fiscal 2013 has gone down 7.0% to $2.64 per share in the last 60 days. The Zacks Consensus Estimate for fiscal 2014 also declined 6.6% to $3.10. With the Zacks Consensus Estimates for both fiscal 2013 and 2014 going down, the company now has a Zacks Rank #5 (Strong Sell).
Cause for Concern
DICK’s Sporting witnessed a dismal performance in two of the last three quarters due to the sluggish consumer environment and unfavorable weather conditions. Apart from the earnings decline, our cautious stance on the stock’s future performance is guided by the company’s lowered earnings and comps outlook for fiscal 2013. DICK’s Sporting now expects earnings per share in the range of 37–39 cents. Comps, adjusted for the calendar shift in fiscal 2012, are expected to range approximately from flat to an increase of 1%.
Moreover, the stock remains vulnerable to a sluggish economic recovery and cautious consumer spending. The sporting goods retail industry is a consumer-driven industry and hence is very sensitive to the health of the economy as sports is majorly a leisure activity. Spending on sporting goods is heavily dependent on the personal disposable income of consumers. The current macroeconomic challenges such as high household debt and unemployment levels may restrain consumers’ spending on sporting goods items.
Risk of sourcing merchandise from overseas markets may prove detrimental to the company’s performance. A significant portion of DICK’s Sporting’s merchandise is manufactured in countries outside the U.S. such as China, Taiwan and South Korea. Accordingly, the company is exposed to political, social and economic risks associated with the operations in these countries.
Further, an adverse movement in foreign currency exchange rates may dent the company’s operational performance.
Other Stocks to Consider
Other stocks worth considering in the beverage industry are Cabela’s Inc. (CAB), Five Below Inc. (FIVE) and Ulta Salon, Cosmetics & Fragrance Inc. (ULTA). All of these stocks carry a Zacks Rank #2 (Buy).