Dick's Sporting Goods Initiated

We recently initiated coverage on sporting goods retailer, Dick’s Sporting Goods Inc. ( DKS - Analyst Report ) , with a long-term Neutral recommendation and a target price of $54.00.

Our neutral stance on the stock is guided by the company’s superb quarterly performance, raised fiscal 2012 outlook and a commendable store growth strategy, offset by heavy dependence on consumer’s disposable income along with the seasonal nature of business and risks associated with sourcing from foreign countries.

Dick’s Sporting's adjusted earnings for the second-quarter 2012 surged 25% year over year to 65 cents per share, beating the Zacks Consensus Estimate of 64 cents. Benefiting from new store openings along with enhanced e-commerce capabilities, the company’s net sales augmented 10% to $1,437 million.

Buoyed by strong quarterly performance, Dick’s Sporting now expects earnings for fiscal 2012 to be in the range of $2.47 to $2.51 per share, up from the previously forecasted range of $2.45 to $2.48. Moreover, Dick’s raised its comps growth range to 4% to 5% from 3% to 4% forecasted earlier.

Dick’s Sporting's unique strategy of offering exclusive branded merchandise, sourced from leading manufacturers, provide it with an edge over cut-throat competition from players like Foot Locker Inc. ( FL - Snapshot Report ) and Hibbett Sports Inc. ( HIBB - Analyst Report ) . Furthermore, the company leverages its strong vendor relationships to source overstock and closeout merchandise at substantial discounts, in order to achieve dual objectives of boosting gross margin while offering compelling value to customers.

Further, the company continues to progress well with its growth initiatives, which include expanding its store base and bringing in technological advancements to better serve its patrons. The company leverages an extensive network of stores to effectively penetrate into its target markets, which in turn, enables the company to generate healthy sales and gain a market share.

For fiscal 2012, the company plans to open approximately 38 Dick's Sporting Goods stores. Over the long term, the company targets reaching the 900 stores mark in the U.S., and bolstering from its current store base of 500.

Apart from expanding its store base, Dick’s Sporting is also focusing on buyers’ needs to generate growth opportunities that will augment sales. The company aims at providing topnotch shopping experience to its customers and has introduced a new mobile application for iPhones and Android Smartphones. The app facilitates consumers to locate the company’s stores in any particular area and provides the ease of directly buying goods by using the application.

We believe that the company’s strategic measures of solidifying its store base and using technology to provide better customer services will enhance its relationship with clients and help attract and retain customers as well as promote its offerings.

On the flip side, the consumer-drive nature of the sporting goods retail industry makes it very sensitive to the health of economy. Spending on leisure items like sports goods proves hard on consumers’ pockets in a challenging economy, thus, impacting the profitability of retailers like Dick’s.

Additionally, Dick’s Sporting's business is seasonal in nature and typically generates stronger sales during the fourth quarter, which is characterized by the holiday and winter sports selling seasons. As a result, the company is exposed to significant risks if the seasons fail to deliver expected operating performance.

However, Dick's Sporting Goods retains a short term Zacks #2 Rank (Buy rating) for the next 1-3 months, as it remains on track with its store expansion strategy, which should help boost the company’s top and bottom lines.