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DICK'S Sporting Stock Up 29% YTD: Will the Rally Continue?

DICK'S Sporting Goods, Inc. DKS is gaining momentum on the back of solid execution of its merchandising strategy and reinforcing omni-channel capabilities. Notably, the company delivered fifth straight positive earnings surprise in third-quarter fiscal 2018. Though softness in the top line is concerning, management’s raised earnings guidance for the fiscal year drives optimism.

So far this year, this Zacks Rank #2 (Buy) stock has advanced 28.9%, outperforming the industry’s mere growth of 3.9%.



Furthermore, the Zacks Consensus Estimate of $3.22 for fiscal 2018 and $3.37 for fiscal 2019 moved up 2.5% and 1.8%, respectively, in the past 30 days. Management envisions earnings per share of $3.15-$3.25, up from $3.02-$3.20 guided earlier and $3.01 earned last year.

Strategic Efforts Bode Well

DICK’S Sporting’s unique strategy of offering exclusive branded merchandise sourced from leading manufacturers provides it with a platform to better compete with other leading players. In fact, the company is progressing well with its merchandising strategy announced in fourth-quarter fiscal 2016, which focuses on optimizing inventory. Further, the company is keen on investing in supply chain to improve in-stock levels, as well as the speed and reliability of online delivery.

In third-quarter fiscal 2018, merchandise margin expanded 213 basis points (bps) driven by lower promotions and better product cycles. Solid merchandise margins have also been driving gross margin, which improved 72 bps despite decline in sales year over year.

DICK’S Sporting also continues to focus on developing every possible avenue to generate higher sales. By strengthening its store network and expanding e-commerce presence, the company remains on track to build the best omni-channel experience for athletes. In the last reported quarter, e-commerce penetration improved to about 12% of net sales, up from 10% in the prior-year quarter. On a year-over-year basis e-commerce sales grew 16%.

Robust growth in private brands, and outdoor and athletic apparel as well as solid e-commerce operations has been aiding the company’s performance. As part of its long-term plan, DICK’S Sporting intends to make significant investments in e-commerce, technology, store payroll, Team Sports HQ and private brands. These endeavors are likely to enrich customers’ experience and augment the top line going forward.

Additionally, DICK’S Sporting’s shareholder-friendly moves appear promising. In a year’s time, management returned more than $417 million via dividends and share repurchases. The company also bought back 3.1 million shares for $107.9 million in third-quarter fiscal 2018, following which it had shares worth nearly $467 million remaining under its existing authorization. Moreover, it announced a quarterly cash dividend of 22.5 cents per share, payable Dec 28.

Bottom Line

Despite these potent growth factors, DICK’S Sporting’s sales lagged estimates for the second straight time when it reported third-quarter fiscal 2018. The company’s low-margin hunting and electronics businesses are primarily weighing on comps and the top line.

In the fiscal third quarter, management had virtually detached all the underperforming hunting products from the 10 namesake outlets, replacing them with compelling assortment categories such as baseball, licensed products and outerwear. Though electronics business remains a headwind in fiscal 2018, changes related to hunting are expected to improve performance in the coming days.

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Tractor Supply Company TSCO has an expected long-term earnings growth rate of 12.2% and a Zacks Rank #2.

Sally Beauty Holdings, Inc. SBH is also a Zacks Ranked #2 stock, which delivered average earnings beat of 1.3% in the preceding four quarters.

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