Advertisement
U.S. markets closed
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow 30

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Russell 2000

    2,125.76
    +11.41 (+0.54%)
     
  • Crude Oil

    83.00
    +1.65 (+2.03%)
     
  • Gold

    2,241.80
    +29.10 (+1.32%)
     
  • Silver

    25.00
    +0.24 (+0.98%)
     
  • EUR/USD

    1.0789
    -0.0041 (-0.38%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • GBP/USD

    1.2620
    -0.0019 (-0.15%)
     
  • USD/JPY

    151.3800
    +0.1340 (+0.09%)
     
  • Bitcoin USD

    70,701.88
    +1,803.35 (+2.62%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Dicks Sporting Goods Inc Surges 25% — And Could Keep Rising

Dicks Sporting Goods Inc (NYSE:DKS) shares are popping after the company reported a double-beat-and-raise quarter against what was supposed to be a weak operating backdrop due to restricted gun sales. (In February, DKS stopped selling assault-style rifles following the Parkland shooting)

In response to the surprisingly good numbers and healthy guide, DKS stock is up more than 25% as of this writing. The stock now sits above $38, its highest level since July 2017 and up 50% from its November lows.

Does this rebound in DKS stock have more firepower?

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

I think so.

Athletic retail as a whole is in rebound mode, supported by equally strong numbers from Foot Locker, Inc. (NYSE:FL) last week. Both of these wholesale athletic retailers were killed in 2017 as worries over the sustainability of wholesale retail stung the athletic retail world. But now they are bouncing back because investors are starting to realize that both FL and DKS are essential and irreplaceable parts of the athletic retail distribution model.

Consequently, both stocks are surging higher.

They fell by quite a bit in 2017, so the rebound in 2018 will also be quite big. That is why I see DKS stock rallying up to and above $40 in the near-term.

Here’s a deeper look:

Dicks Is Proving Its Value

The narrative in athletic retail isn’t too complex.

2016 was a year of market share grabbing. Due to rapid e-commerce encroachment, almost everyone in the athletic retail space without significant size went out of business rather quickly. That left the last men standing, like DKS, with lots of market share to grab.

That is why DKS stock rallied in 2016.

2017, though, was a year of right-sizing. Although DKS benefited from market share gains in 2016, big athletic brands like Nike Inc (NYSE:NKE) cut those benefits short in 2017 by making an aggressive direct sales push. That meant emphasizing direct sales over wholesale sales, and that put pressure on the operating results of wholesale athletic retailers like DKS.

That is why DKS stock dropped in 2017.

Now, 2018 is shaping up to be a year of regaining lost share. As it turns out, Nike and other athletic retail brands can’t run an entirely direct sales model because their wholesale partners have huge reach. Thus, any distribution model that aims at maximizing product exposure will include DKS. Moreover, DKS is aggressively building up its own private-label brands, thus mitigating the adverse effects of Nike’s direct sales push.

That is why DKS stock is rebounding in 2018.

Dicks Stock Will Keep Rebounding

This rebound in Dicks stock will persist.

Comparable sales trends are improving, and starting to look flat on a two-year basis. As a result, management’s guide for flat to low singe-digit growth in comparable sales this year seems reasonable.

Moreover, going forward, DKS should be able to consistently post comparable sales growth in that 0-2% range because the company has staying power in the athletic retail world. Unit growth should move along at 0-1%, and that should lead to overall sales growth over the next several years of roughly 0-3%.

Meanwhile, gross margin erosion is moderating, yet another sign that things are improving for DKS.

Over time, as more premium and private-label product comes on shelves, gross margins at DKS should stabilize around present 29% levels. Meanwhile, the operating expense rate should stabilize around 24% due to management’s focus on cost-cutting, as well as lower pre-opening expenses as a result of less store openings. That combination leads to operating margin stabilization around 5%.

Under the assumption that sales should grow around 0-3% per year and that operating margins stabilize around 5%, I believe that $4 in earnings per share is achievable for DKS in 5 years. A market-average 16-times forward multiple on $4 implies a four-year forward price target $64. Discounted back by 10% per year, that equates to a present value of around $44.

Bottom Line on DKS Stock

The rebound in DKS stock has begun, and it will continue thanks to the company’s staying power in the athletic retail world. All in all, I see DKS stock rallying up to and above $40 in the near future.

As of this writing, Luke Lango was long DKS and FL. 

More From InvestorPlace

Compare Brokers

The post Dicks Sporting Goods Inc Surges 25% — And Could Keep Rising appeared first on InvestorPlace.

Advertisement