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DICK's Sporting Looks Confident: Will Growth Persist in 2018?

Zacks Equity Research

DICK’s Sporting Goods Inc. DKS has been doing well backed by solid third-quarter fiscal 2017 results, investments in e-commerce, store technology and store payroll as well as DICK's Team Sports HQ and private brands.  Also, the company remains confident about driving market share growth in the fourth quarter and fiscal 2018 owing to its current strategy and initiatives. However, this Zacks Rank #3 (Hold) company has been facing strained margins amid tough retail landscape, which remains a concern.

Consequently, shares of DICK’s Sporting have gained 7.8% quarter to date compared with the industry’s growth of 5.2%. This marks a significant improvement from the company’s decline of 45.2% year to date. Let’s now discuss the factors aiding stock performance.

Solid Q3 and Raised Fiscal 2017 Guidance Drive Optimism

DICK’s Sporting delivered a positive earnings surprise in third-quarter fiscal 2017, after a miss in the preceding quarter. In fact, the stock reported robust results in the quarter with both earnings and sales beating estimates. This marked the company’s second straight top-line beat, while it surpassed estimates for the fifth time in the last six quarters. Results were fueled by the strength of golf, athletic footwear and private brands businesses as well as sturdy e-commerce growth.

Following the splendid third-quarter performance, the company provided a favorable fourth-quarter outlook and raised its earnings view for fiscal 2017. Management now projects adjusted earnings in the range of $2.92-$3.04 per share for fiscal 2017 compared with $2.80-$3.00, guided earlier. Further, the company envisions earnings to lie in the band of $1.12-$1.24 per share for the fiscal fourth quarter.

Strategic Growth Initiatives Bode Well

DICK’s Sporting remains keen on generating greater sales through various initiatives including strengthening store network and e-commerce growth. Evidently, the company reported nearly 10.3% sales growth in the third quarter while e-commerce sales grew 16%. Moreover, the company plans to make significant investments in DICK's Team Sports HQ as well as in the development and maintenance of private brands. Additionally, it expects to increase investments in e-commerce, the technology in its stores and store payroll to enhance consumer experience.

Backed by its current strategies, management remains confident about driving market share growth in the fiscal fourth quarter and throughout fiscal 2018. These endeavors are likely to enrich customers’ experience and augment the top line.

Compatible Merchandising Strategies

DICK’s Sporting is progressing well with its merchandising strategy (announced in fourth-quarter fiscal 2016), which is all about optimizing inventory in order to make shelves available for popular and private label brands. In the process, the company targets cutting down nearly 20% of its vendor list in fiscal 2017 to focus on strategic vendors that provide both online and offline business. These vendors are not only expected to drive business growth but also differentiate DICK’s Sporting from others in the market.

Difficult Retail Scenario to Hurt Margins & EPS

Although DICK’s Sporting topped the Zacks Consensus Estimate in the fiscal third quarter, traces of a challenging retail landscape were visible in the soft margins that were impacted by a highly promotional backdrop, among others. The company’s intense promotions in order to clear inventory also hurt merchandise margins, thereby reducing gross margin by 307 basis points (bps). Meanwhile, occupancy de-leverage, elevated shipping and fulfillment expenses as a percentage of sales, weighed upon margins.

Going forward, the company expects the retail environment to be extremely promotional in the fourth quarter and fiscal 2018. This apart, excess inventory in the supply chain, broadened distribution strategies from some vendors and lack of innovation and novelty are likely to keep margins under pressure.

Consolidated operating margins are expected to decrease year over year in both fourth quarter and fiscal 2017 due to lower gross margin offset by SG&A leverage. Furthermore, the company expects the aforementioned investments, a challenging environment, continued gross margin pressure and nearly flat comp sales to hurt earnings per share by nearly 20% for fiscal 2018 compared with fiscal 2017 levels.

Do Retail-WholeSale Stocks Grab Your Attention? Check These

Investors interested in the same sector may consider Zumiez Inc. ZUMZ, Shoe Carnival Inc. SCVL and Wal-Mart Stores Inc. WMT. While Zumiez and Shoe Carnival sport a Zacks Rank #1 (Strong Buy), Wal-Mart carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zumiez Sports delivered an average positive earnings surprise of 22.2% in the trailing four quarters. It has a long-term earnings growth rate of 18%.

Shoe Carnival pulled off an average positive earnings surprise of 20.7% in the trailing four quarters. It has a long-term earnings growth rate of 12%.

Wal-Mart came up with an average positive earnings surprise of 2.2% in the trailing four quarters. It has a long-term earnings growth rate of 6.1%.

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