Dicks Sporting Goods Inc (DKS): More Headwinds Ahead

RBC Capital's Scot Ciccarelli delivers a cautious perspective on DKS shares following a mixed bag of a fourth quarter performance.

After a rather “mixed” fourth quarter print from Dicks Sporting Goods Inc (NYSE:DKS), RBC Capital analyst Scot Ciccarelli continues to be sidelined on the biggest sporting goods retailer in the United States.

In reaction, the analyst reiterates a Sector Perform rating on DKS stock with a $32 price target, which implies a close to 3% downside from current levels. (To watch Ciccarelli’s track record, click here)

While Ciccarelli believes gross margin pressures will see improvement this year, e-commerce has dialed back and headwinds still linger.

For the fourth quarter, comps slipped (2%) with adjusted 13 week EBIT weakening by around a (22%) loss. For context, Ciccarelli had been angling for a (1%) decline- which he had boosted from a (2.5%) waning anticipating sales would have been robust in winter gear and apparel from a “harsher” winter. Gross margins of 29.6% outperformed the analyst’s expectations for 28.6%. However, SG&A hit at 22.2%, underclassing the analyst’s 21.2% estimate. Adjusted EBIT margins landed at 7.4%, aligning with the analyst’s expectations, with adjusted EBIT reaching around $196.4 million against Ciccarelli’s $209.2 million forecast- a noted 15% decrease year-over-year in growth. Yet, the retailer was able to gain nearly $15 million of EBIT from its 53rd week. Therefore, by Ciccarelli’s calculations, EBIT would have dived around $50 million, or 22% year-over-year. Adjusted EPS reached $1.22 on a 14-week basis. Yet, under the analyst’s assumed 37.5% tax rate, adjusted EPS would have brought in $1.18, which would still come up shy of Ciccarelli’s $1.25 projection.

“4Q results were generally mixed, with worse-than-expected sales and SG&A being partially offset by better GMs. Management thinks the heaviest part of their price investments are behind them, but we suspect these efforts are not a one-and-done process. While the stock seems inexpensive and GM pressures should moderate in 2018, adjusted EBIT declined ~10% in FY17 and more headwinds remain,” explains the analyst.

On the heels of the earnings show, the analyst is adjusting his comp projection from +0.5% down to (0.5%) for 2018. Meanwhile, Ciccarelli scales back his EPS expectations from $3.05 to $2.95 for the year taking under account “modest declines in GMs and over 100 bps of SG&A deleverage from the low comp threshold and increased investment spend,” as he adds: “Our PT remains at $32 as we take our multiple up to 11.0x from 10.0x as the pace of GM contraction should start to moderate in 2018.”

Overall, “Accelerated investments and muted comps will offset better than expected GM outlook – GMs are now expected to decline less than previously expected,” notes Ciccarelli, who concludes that firearm policy changes will haunt shares: “the company is still expecting particular sales pressure in the guns/hunting category […]”

TipRanks indicates a cautious, yet optimistic analyst consensus surveying this retailer. Out of 16 analysts polled in the last 3 months, 8 rate a Buy on DKS stock, 7 maintain a Hold, while 1 issues a Sell. With a return potential of 6%, the stock’s consensus target price stands at $35.00.