Oppenheimer’s Take on 2 Retail Players: Dicks Sporting Goods Inc (DKS), Home Depot Inc (HD)


Dicks Sporting Goods Inc (NYSE:DKS) and Home Depot Inc (NYSE:HD) are movers and shakers on the downward slope today in the upshot of quite opposite second-quarter earnings.

Oppenheimer analyst Brian Nagel assesses the sports retailer with relief he stepped to the sidelines before the dismal quarterly aftermath, anticipating that DKS management’s chopped guide for 2017 surely has something to do with investors not being able to escape fast enough, sending the stock quickly plummeting. However, when it comes to the home improvement retailer, Nagel could not be more bullish in his review of the print, finding Home Depot one of the best-run retailers across the globe with good reason.

Dick’s Sporting Goods’ Leads Sports Retail Pack- But Near-Term Is Rocky

Dick’s Sporting Goods stock is clattering 20% to the floor after this morning proved to be a rude awakening for investors who were met with second-quarter earnings that included a shattered outlook for the year. It is clear this sports retailer will have to step up its game to defend its spot on the market share leaderboard on the heels of such a stark earnings miss.

At a brief first glance, Nagel has his eyes peeled to sales growth that has grown “dramatically” stagnant at Dick’s, which further backs his decision to run from the bulls earlier this year to the sidelines.

In reaction to the print, the analyst continues to watch out for short-term hurdles that threaten the retailer, reiterating a Perform rating on shares of DKS without listing a price target. (To watch Nagel’s track record, click here)

For the second quarter, DKS underclassed its own adjusted EPS guide, even though there was a step-up from last year’s $0.82 to this quarter’s 18% year-over-year rise to $0.96. Consensus had been looking for $1.00 and the DKS team had projected outlook between $1.02 and $1.07. Nagel believes, “Softer comp trends and a marked step down in gross margins primarily drove the earnings miss.”

Meanwhile, the analyst can’t help but question if “comps are [now] fizzling out?” with trends staying flat compared to a 2.9% rise witnessed back in the first quarter. The DKS team attributes this to shortcomings in hunting, licensed, and athletic apparel, which Nagel comments “more than offset” an improvement in sales from footwear and golf segments. Likewise, gross margins are really under hot water, falling from last year’s 30.4% to 29.5%, far underwhelming consensus expectations of 30.6%. However, Dick’s hopes to attack this weakness with a new price matching initiative.

A rough spot for DKS is the upshot of full-year outlook that took a hit, with the Dick’s team cutting back on adjusted EPS guidance from $3.65 to $3.75 down to $2.80 to $3.00- which compared to the present Street projection of $3.62 is a far cry from expectations. Likewise, Dick’s introduced a third-quarter EPS guide of $0.22 to $0.33 on back of a low single-digit comp slowdown, shortchanging Street estimates calling for $0.56 on comps of 0.5% growth.

On the heels of the print, the analyst has likewise reigned in his estimates, taking EPS for the year from $3.68 down to $2.84 and taking his EPS projection for 2018 from $3.93 down to $3.02.

Nagel concludes seeing his decision to shift to the sidelines was a good one, underscoring, “In earlier 2017, we lowered our rating on Dick’s Sporting Goods (DKS) to Perform from Outperform (Feb. 21st at $49.79) upon indications of sales weakness in the category and concerns that comps at the chain could slow markedly as comparisons turn more challenging. We reiterated our cautious, near-term stance on DKS last week in our Hardlines Q2 Outlook report. The weaker than expected Q2 (July) results and now much lower 2017 guidance that DKS announced today very much “confirm our fears.” DKS continues to represent the leading Sporting Goods chain in the US. We are worried, however, that despite its standing, DKS will still prove susceptible to unfavorable industry headwinds at least through the balance of the year.”

TipRanks analytics indicate DKS as a Buy. Out of 17 analysts polled by TipRanks in the last 3 months, 7 are bullish on Dick’s Sporting Goods stock while 10 remain sidelined. With a return potential of nearly 78%, the stock’s consensus target price stands at $49.10.

Home Depot Knocks It Out of the Park

Home Depot shares are taking a roughly 3% dip today amid fears that the domestic housing market is on the precipice of hitting a deceleration. Yet, Nagel conversely does not have enough trumpets and horns to celebrate the leading home improvement retailer’s winning home run for its second quarter earnings beat.

Therefore, despite some investors who are playing it safe, the analyst maintains an Outperform rating on HD with a price target of $178, which represents a close to 19% increase from where the stock is currently trading.

For the second quarter, the retailer saw EPS soar past 14% year-over-year from this time last year’s EPS of $1.97 onto $2.25, outperforming consensus of $2.21. “Stronger top-line growth during the company’s all-important Spring selling season and continued operating leverage drove better than expected results in the quarter,” pinpoints the analyst, who commends another outclass from Home Depot.

Total company comps also fared quite well, ascending 6.3% past last year’s already 4.7% climb, soaring beyond consensus of just 4.9%. To put it bluntly: “gross margin resilience continues.” This is one of the many reasons Home Depot is a stock worth the bet, as the analyst highlights, “The company continues to re-invest underlying upward momentum in margins to remain competitive across the space.”

Full-year guidance also received a solid lift, with HD management taking EPS for 2017 from $7.15 up to $7.29 against Street expectations of $7.24. Comp sales guidance also sees a rise from 4.6% to 5.5%, topping consensus of 5.0%. Total sales growth towers at 5.3% for the year, a step-up from the prior growth of 4.6%.

As such, the analyst has boosted his own estimates, taking his EPS projection from $7.23 up to $7.30 and his EPS forecast for 2018 from $8.12 up to $8.16- indicating what would mark Home Depot’s ninth year running of double-digit EPS growth.

Nagel contends today is a day to truly appreciate the stellar performance from Home Depot that has solidified itself as a top pick once over, cheering, “We are running out of adjectives to properly describe the underlying strength and consistency of quarterly results from Home Depot (HD). Early this morning, HD indicated that in Q2 (July), US comp store sales of +6.6% helped to fuel a more than 14% increase in EPS, to $2.25 from $1.97 last year. Management lifted 2017 EPS guidance to $7.29 from $7.15, upon an expected total company comp store sales gain of 5.5% (up from +4.6% previously). We have for a long while advocated HD as one of the best-run retailers in the world and amongst our top picks within larger cap Hardlines stocks. The better than expected Q2 (July) results and updated guidance that HD reported today again help to support our positive thesis on the shares.”

TipRanks analytics demonstrate HD as a Strong Buy. Based on 12 analysts polled by TipRanks in the last 3 months, 10 rate a Buy on Home Depot stock while 2 maintain a Hold. The 12-month average price target stands at $174.20, marking a 16% upside from where the stock is currently trading.

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