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Will DICK'S Sporting (DKS) Shares Continue to Trend Higher?

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Shares of DICK’S Sporting Goods Inc. (DKS - Free Report) have been rallying recently, driven by an impressive first-quarter fiscal 2018 and improved earnings view for fiscal 2018. Additionally, the company’s investments in e-commerce, technology, store payroll, Team Sports HQ and private brands bode well.

This led to an upsurge in the stock price, which also hovers close to its 52-week high. This Zacks Rank #3 (Hold) stock has rallied 19.9% in the past month, outperforming 4.9% growth recorded by the industry.


 

Notably, DICK’S Sporting reported third straight positive earnings surprise in the fiscal first quarter while sales beat for the third time in four quarters. During the reported quarter, earnings gained from the solid execution of merchandising strategies, resulting in improved merchandise margins. Alongside solid e-commerce growth, sales gained from strength in Team Sports, Fitness Equipment, outdoor apparel and private brands. Following the robust quarterly results, management raised its earnings per share guidance for fiscal 2018. The raised view was mainly backed by lower share account along with improved margin trend and lower tax rate in the fiscal first quarter.

Strategies Supporting Growth of DICK’S Sporting

DICK’S Sporting has been gaining from continued focus on developing every possible avenue to generate greater sales. The company remains on track to build the best omni-channel experience for athletes, by strengthening its store network and expanding e-commerce presence. Notably, e-commerce penetration improved to 11% of net sales from 9% in the prior-year quarter. Moreover, e-commerce sales grew 24% year over year in the fiscal first quarter.

Furthermore, the company’s unique strategy of offering exclusive branded merchandise, sourced from leading manufacturers, provides it with a platform to compete. DICK’S Sporting is progressing well with its merchandising strategy (announced in fourth-quarter fiscal 2016), which is all about optimizing inventory to make shelves available for popular and private label brands. In the future, the company is keen on investing in the supply chain to improve in-stock levels as well as the speed and reliability of online delivery. These investments will not only improve customer satisfaction and inventory turnover but also boost merchandise margin rates.

Possible Deterrents

Though the top line of DICK’s Sporting improved both year over year and against estimates, continued softness in the hunting and electronic categories are deterrents to top-line growth. Notably, changes to firearm policies resulted in accelerated declines in the category, which significantly weighed on the performance of the hunting business. Moreover, the electronics business reported high-double-digit comps decline as the company plans to exit this business. The company expects the hunting and firearm, as well as electronics businesses, to experience headwinds throughout fiscal 2018, which will hurt comps. The hunting and firearm business will continue to be impacted by the recent changes to the company’s firearm policies while the electronics business will be hurt by reduced exposure.

Additionally, the company’s margin trend has been a headwind for a while now, which is evident from the persistent fall in gross and operating margins. Though the margin trend improved in the fiscal first quarter, due to enhanced merchandise margins and lower promotions, it still remained negative. Notably, the company’s gross margin dropped 35 basis points (bps) in the fiscal first quarter, after witnessing declines of 130 bps, 307 bps, 82 bps and 17 bps, respectively, in the preceding four quarters. Meanwhile, the company recorded operating margin declines of 30 bps, 205 bps, 207 bps, 10 bps and 53 bps, respectively, in the last five quarters.

Moreover, the company expects product innovation from its key partners, along with the expansion of private brands business, to lower margin pressures than previously anticipated. However, the company still expects gross margin to remain slightly negative for fiscal 2018, including rent expenses, and shipping and fulfillment costs.

Bottom Line

Though concerns regarding margins and softness in the hunting and electronic categories remain, DICK’S Sporting’s ongoing strategies provide visibility for growth in the future. This is further supported by the company’s long-term earnings growth rate of 10% and a Value Score of B.

Looking for Trending Picks? Look at These

Some better-ranked stocks in the retail space are Big 5 Sporting Goods Corp. (BGFV - Free Report) , Five Below Inc. (FIVE - Free Report) and Fossil Group Inc. (FOSL - Free Report) . While Big 5 Sporting flaunts a Zacks Rank #1 (Strong Buy), Five Below and Fossil Group carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Big 5 Sporting has pulled off an average positive earnings surprise of 10.5% in the last four quarters. The stock has rallied 25.2% in the last three months.

Five Below, which has returned 47.6% in the last three months, has delivered an average positive earnings surprise of 16% in the trailing four quarters.

Fossil Group has long-term earnings growth rate of 5%. Further, the company’s earnings have outpaced the Zacks Consensus Estimate in each of the trailing four quarters, with the average beat of 54.1%.

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