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DICK'S Sporting (DKS) to Stay Afloat Amid Cost & Tariff Woes

Zacks Equity Research

DICK'S Sporting Goods, Inc. DKS has been reeling under higher costs, which have been weighing on its margins for quite a while now. Gross margins were flat in first-quarter fiscal 2019 owing to gains from strong merchandise margins and occupancy leverage. However, this was largely offset by higher shipping and fulfillment costs, stemming from solid e-commerce growth and inflationary headwinds that drove the freight costs. Due to higher shipping related costs, the company’s gross margin rate for e-commerce is lower than that of its stores.

Further, adjusted SG&A expense, as percentage of sales, rose 67 bps in the fiscal first quarter. Increased SG&A expense is mainly attributed to continued investments in business. The persistence of escalated freight costs and other investments should be a constant hurdle to margin growth in the near term.

Hit by the cost headwinds, shares of the company have dipped 1.4% in a year against the industry’s growth of 8.5%.

Furthermore, DICK’S Sporting like most of its peers in the apparel industry remains exposed to significant concerns due to the recent increase in tariffs for List 3 goods from 10% to 25%, which were announced on May 10. Going forward, the company’s athletic apparel business, especially footwear, is likely to bear the brunt of these tariff increases to 25%. The company stated that its original guidance for fiscal 2019 factored in only 10% tariffs on these goods. Further, how much these tariffs will influence the company’s pricing strategy is yet to be ascertained.

Strategic Initiatives to Fuel Growth

Nevertheless, the company’s robust earnings trend and an upbeat outlook bring optimism. Notably, the company delivered a positive earnings surprise in six of the last seven quarters, including first-quarter fiscal 2019. Results gained from solid same-store sales.

Notably, the company exited from its electronics business in the fourth quarter of fiscal 2017 to mitigate the ongoing downsides in this segment. Further, it is on track to remove the troubled hunt category gradually. Following the removal of the hunting category at 10 DICK’S Sporting stores in third-quarter fiscal 2018, the stores witnessed a surge in traffic. These stores generated positive comps and sturdy margin growth in the fiscal first quarter. Having said this, the company expects hunt comps and sales to remain significantly negative throughout fiscal 2019 as the industry woes continue to prevail.

Going ahead, the company plans to eliminate the hunting category from nearly 125 more stores (where the category is underperforming) in second-quarter fiscal 2019. As previously done, this category will be replaced by a more compelling assortment. The company now anticipates same-store sales to inch up 2% for fiscal 2019 against a decline of 3.1% in fiscal 2018.

The company remains optimistic about these efforts and raised its earnings view for fiscal 2019. Adjusted earnings are expected to be $3.2-$3.4 per share, up from the earlier guided range of $3.15-$3.35.

Further, the company’s merchandising strategy and omni-channel endeavors bode well. Omni-channel investments throughout fiscal 2019 will be focused on enhancing in-store experiences for athletes, improving e-commerce fulfillment capabilities and developing technology solutions to boost athlete experience and employee productivity. Keeping in these lines, the company plans to open two dedicated e-commerce fulfillment centers in New York and California during the fiscal third quarter. Additionally, the company is making attempts to better its digital marketing efforts by strengthening partnerships with Google GOOG and Facebook FB, which in turn, should bode well.

The company is also optimizing inventory to make shelves available for popular and private label brands as part of its merchandising efforts. Some of its actions to improve in-store experience include the space reallocation to regionally relevant and growing categories, the rollout of HitTrax technology and batting cages in several stores, expansion of strike point presentations and investment in product development teams. The company introduced HitTrax technology and batting cages to roughly 150 stores in the fiscal first quarter and intends to open 20 more outlets in the fiscal second quarter.

Further, the company is focused on private brands and is on track to launch new brands as part of its $2-billion sales target in private brands. These actions will not only perk up customer satisfaction and inventory turnover but also elevate merchandise margin rates.

Bottom Line

Although the DICK’S Sporting stock is currently affected by cost issues, we remain encouraged about the company’s initiatives, which should position this Zacks Rank #2 (Buy) company well for growth in the long term.

Meanwhile, investors may also consider checking out another top-ranked stock like Hibbett Sports Inc. HIBB, which has a long-term earnings growth rate of 6.5% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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