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DICK's Sporting Upped to Neutral

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On Dec 9, we upgraded sporting goods retailer, DICK’s Sporting Goods Inc. (DKS - Free Report) to Neutral, based on the company’s upbeat fiscal 2013 earnings forecast and an encouraging fourth-quarter outlook.

Why the Upgrade?

We are encouraged by the company’s growth initiatives, which include expanding its store base and incorporating technological advancements to serve its patrons better. The company leverages an extensive network of stores to effectively penetrate into its target markets, which in turn, enable it to generate healthy sales and gain market share. Further, DICK’s Sporting remains focused on enriching the shopping experience for customers.

DICK’s Sporting is witnessing impressive top-line growth, as evident from its strong third-quarter fiscal 2013 results. Also, the company’s net sales in the quarter rose 6.7% to $1,400.6 million, primarily driven by store openings and enhanced e-Commerce capabilities.

Further, the company’s earnings of 40 cents per share came ahead of its own guidance range of 37–39 cents and beat the Zacks Consensus Estimate by a penny. The company has a history of beating the Zacks Consensus Estimate.  In the last 21 quarters, DICK’s Sporting surpassed the estimate 18 times with an average beat of 16.1%.

Buoyed by better-than-expected third-quarter results, DICK’S Sporting raised its lower-end earnings guidance for fiscal 2013. Management now anticipates adjusted earnings between $2.62 and $2.65 per share, as compared with the earlier guidance range of $2.60–$2.65. Comps are still projected to range approximately from flat to an increase of 1%.

However, we are only slightly optimistic about the stock, given the sluggish economic recovery and cautious consumer spending environment. Retailers are facing significant macroeconomic challenges, resulting weak traffic so far this year.

Moreover, the sporting goods retail industry is a consumer-driven industry and hence sensitive to the health of the economy, as sport is majorly a leisure activity. Spending on sporting goods is heavily dependent on the personal disposable income of consumers. At present, factors such as high household debt and unemployment levels may restrain consumers’ spending on sporting goods items.

Sourcing merchandise from overseas markets entail considerable risks, which could be detrimental to the company’s performance. A significant portion of DICK’s Sporting’s merchandise is manufactured in countries outside the U.S. such as China, Taiwan and South Korea. Accordingly, the company is exposed to political, social and economic risks associated with the operations in these countries.

Other Stocks to Consider

Currently, DICK’s Sporting holds a Zacks Rank #3 (Hold). However, some better-ranked stocks in the miscellaneous or diversified retail industry include CST Brands, Inc. , Barnes & Noble, Inc. and Marinemax Inc. (HZO - Free Report) . While CST Brands has a Zacks Rank #1 (Strong Buy), Barnes & Noble and Marinemax carry a Zacks Rank #2 (Buy).

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