Dick’s Sporting Goods (DKS): Investors Should Stick to the Sidelines Despite Strong Q1 Outclass, Says Oppenheimer

Oppenheimer's Brian Nagel gives DKS kudos for pulling off an impressive Q1 earnings show, but looming chain hurdles remain.


Dick’s Sporting Goods (NYSE:DKS) stock is on a monster rally today, thanks to first quarter earnings that were far stronger than investors had feared- along with a lift in the full-year guide for 2018. In reaction, shares are skyrocketing 27%. However, one analyst while impressed with the quarter recommends not to make a bullish bet on the biggest sporting goods retailer in the U.S.

Oppenheimer analyst Brian Nagel‘s advice is simple: “stay on the sidelines with DKS.” The consumer giant is not out of the woods just yet, with obstacles lingering from a business model revamp to comp trends still under hot water.

As such, the analyst reiterates a Perform rating on DKS stock without listing a price target. (To watch Nagel’s track record, click here)

For the first quarter, DKS outclassed its earnings in the year previously that realized an adjusted $0.54 in EPS, rising to $0.59- and beating out the Street’s $0.45 projection. Notably, the DKS team did not offer a financial guide for the quarter. Meanwhile, a stronger-than-anticipated gross margin dip coupled with better expense leverage assisted in the company’s earnings outclass.

“Comp trends remain pressured,” notes Nagel, with same store sales mellowing to (2.5%) on a 13-week to 13-week basis and “on top of a +2.4% gain in the prior year.” Worthy of note, this came up shy of the Street’s (1.5%) forecast, with the DKS team pointing out more weakness haunting hunt and electronics as well as cold and wet spring weather yielding a “negative impact.”

Positively, the margin dip was not as sharp as Wall Street had anticipated, dipping from last year’s 29.6% to just 29.3%, and outperforming the Street’s 28.7% estimate.  “Product newness and strength in private brands helped drive merchandise margins up in the quarter,” adds the analyst.

For full 2018, the DKS team now boosts earnings expectations from a prior range of $2.80 to $3.00 per share up to a new range of $2.92 to $3.12. On back of the print, the analyst boosts his EPS expectations from $2.83 up to $2.94 for the year and likewise dials up his EPS forecast for 2019 from $2.70 up to $2.82. The DKS team’s expectations for full-year comp sales continue flat do down low-single ditis, which aligns with the Street’s current estimate for EPS of $2.92 contingent upon a (0.6%) comp fall.

Ultimately, “We applaud DKS for managing successfully a difficult sector backdrop, exasperated by unfavorable weather through much of Q1. However, we recommend clients remain on the sidelines with DKS. In our view, meaningful challenges remain for the chain as it continues to reconfigure its business model to compete better in an increasingly omni-channel marketplace, including outsized price promotions as other operators struggle, the propensity for leading vendors to go more direct to consumers, and shifting consumer demand for once key categories. Clients seeking a more compelling, larger cap growth name are advised to look to shares of Outperform-rated Tractor Supply (TSCO),” surmises Nagel.

TipRanks suggests caution lingers as the word on the Street dragging DKS shares. Out of 9 analysts polled in the last 3 months, only 2 are bullish on the consumer giant with 7 remaining sidelined on DKS stock’s prospects. With a loss potential of nearly 13%, the stock’s consensus target stands low at $33.80.

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