Shares of DICK'S Sporting Goods, Inc. DKS have outperformed the industry in the past three months. We note that shares of this Coraopolis, PA-based company have gained 11.4% in the aforementioned time frame compared with the industry’s decline of around 23%. Also, the stock has comfortably outperformed the Retail – Wholesale sector and the S&P 500 Index that advanced 2.4% and 1.3%, respectively.
Meanwhile, the stock is close to its 52-week high of $41.21. Again a Value Score of A suggests there is more room for the stock to run. DICK'S Sporting looks attractive with respect to a forward price-to-earnings (P/E) multiple of 11.2x versus industry’s 13.5x. A more-or-less similar picture emerges when comparing with price-to-book ratio. The company holds an edge here with a P/B ratio of 1.9 lower than 5.4 for the industry.
We note that the company is gaining from its focus on merchandising strategy and omni-channel efforts. Also, this Zacks Rank #3 (Hold) company is poised to benefit from the removal of hunt category from its stores. Further, its store opening plans should render the required support for growth.
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Factors Driving DICK'S Sporting Performance
DICK’S Sporting is progressing well with the merchandising strategy, which is all about optimizing inventory to make shelves available for popular and private label brands. Its efforts to improve in-store experience include 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.
Further, the company is focused on private brands and is on track to launch new brands as part of its $2-billion sales goal in private brands. These actions will not only improve customers’ satisfaction and inventory turnover but also boost merchandise margin rates.
DICK’S Sporting has been benefiting from continued focus on developing every possible avenue to generate greater sales. As part of its long-term plan, DICK’S Sporting plans to make significant investments in e-commerce, technology, store payroll, Team Sports HQ and private brands. It also remains on track to build the best omni-channel experience for athletes by strengthening store network and expanding e-commerce presence. This led to e-commerce sales growth of 21% in the fiscal second quarter. E-commerce penetration improved to about 12% of net sales in the reported quarter, up from roughly 11% in the prior-year quarter.
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 opened two dedicated e-commerce fulfillment centers in New York and California. Additionally, it is making efforts to improve digital marketing efforts by strengthening partnerships with Google GOOG and Facebook FB, which should bode well.
Also, the company is on track with store opening plans. In fiscal 2019, it plans to open eight namesake and two Golf Galaxy stores. Of these, it expects to inaugurate seven stores in the third quarter of fiscal 2019. Meanwhile, it plans to relocate three namesake stores and two Golf Galaxy stores.
The company also inaugurated two flagship stores in September in the states of Washington and Pennsylvania. With the accretion of these stores, it will operate 728 DICK'S Sporting Goods stores across 47 states. The new store in Washington is located at Columbia Center in Kennewick. Meanwhile, the outlet in Pennsylvania has opened doors at Plymouth Meeting Mall, with an inaugural fest held between Sep 21 and 22.
DICK'S Sporting, which shares space with Hibbett Sports HIBB, is also on track with the removal of the hunting category from its stores. During the second quarter, the company eliminated the hunting category from nearly 125 more stores (where the category is underperforming). This category was replaced with a more compelling assortment. Backed by these efforts, it generated positive consolidated comparable store sales (comps) growth in the fiscal second quarter. Comps were aided by rise in both average ticket and transactions. This marked its strongest quarterly comps since 2016.
The company now anticipates same-store sales to be up low single digits in fiscal 2019. Same-store sales had declined 3.1% in fiscal 2018. For fiscal 2019, management expects adjusted earnings to be $3.30-$3.45 per share, up from the earlier guided range of $3.20-$3.40.
Hurdles on the Way
Despite the positives, higher shipping and fulfillment costs stemming from strong e-commerce growth remain a threat to margins. The company is witnessing higher SG&A expense due to continued investments in business. The persistence of increased freight costs and other investments should remain a hurdle for margin growth in the near term. Moreover, the increase of tariff on imports from China remains a concern.
Nevertheless, we expect all aforementioned growth drivers to offset minor hurdles and continue to sustain momentum.
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