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Stocks: Dick's Sporting Goods Is Not Doing So Hot


One of the negatives that's not mentioned much is that new management at Sports Authority, the second largest national chain, could well be rolling out a new operating strategy by year's end.

On September 26, 2013, with Dick's Sporting Goods (NYSE:DKS) stock at $53, I stated that the stock was 12-20% overpriced, discounting a 15% long-term EPS growth rate (see: Analysts Are Ignoring Future Pricing Problems at Dick's Sporting Goods). With the stock down 19% from its $53 price after the last quarter's EPS announcement, it seems my thinking was correct, and the stock is probably now efficiently priced.

You can be right on overvalued stocks for at least two different reasons: because you got the fundamentals right, or because the fundamentals you have not considered have had a disproportionate impact on an overvalued stock. That was true in this case.

I didn't see a large amount of firearms sales for Dick's dropping precipitously. I also did not see a 20% decline in golf sales. I believe that the decline in golf sales was at least partly related to the economy; golf equipment is a delayable, somewhat big-ticket purchase relative to other things in the store. Indeed, my theory goes along with consumer pressure seen elsewhere in the economy lately -- such as punk GDP growth and job growth that's only in low-paying positions. My guess is that some of the 30- to 35-cent EPS cut for this year is cyclical or secular, depending on your view of the true course of an economy with questionable fundamentals. That said, I do not know what to make of "the bottom is unclear," regarding golf.

So, at this point, the new EPS numbers for this year and next are, respectively, $2.80 and $3.23; these numbers discount a 7% long-term growth rate using a 3.4% long bond for a risk-free rate (I now figure the economy to be so punk that I no longer add anything to counter quantitative easing), a 7% risk discount, and a 1.5% terminal growth rate. Last September I said that I expected a five-year EPS growth rate of around 12%, if gross margin holds, and I had no confidence in that happening. 

But with only a 30 bps gross margin decline to 30.6% in the quarter, and a 6.6% comp outside of hunting and golf, the gross margin pressure that I expected from more competition -- especially from lower priced Academy, in its increasingly South and Southwestern openings -- has not yet come to pass. A 12% growth rate with some gross margin pressure could end up being still higher than the implied 7% in the current $43 price. There are a few negatives, however: the present inventory overhang to be worked through; challenging same store sales comparisons of .4%, 3.3% and 7% for the next three quarters, respectively; management not being able to see a bottom in golf; and a seemingly slowing US economy. The secular square-footage growth rate is around 9%, and because its stores open at 90% of mature sales productivity, I fear gross margin pressure from competition could have a surprising and scary (for investors) effect on that new opening number over the next few quarters.

Another negative not mentioned much, if at all, is that new management at Sports Authority, the second largest national chain, could well be rolling out a new operating strategy by year's end. These considerations still make the stock look like a falling knife, trumping my usual inclination to be in early.

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No positions in stocks mentioned.
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