DICK'S Sporting Gains From Robust Strategies Amid Cost Woes

DICK'S Sporting Goods, Inc. DKS is gaining from its focus on merchandising strategy and omni-channel efforts. Also, the company is poised to benefit from removal of the hunt category from its stores. It is also on track with store opening plans.

All these factors helped the company to deliver robust second-quarter fiscal 2019 results, wherein earnings and sales outpaced the Zacks Consensus Estimate and grew year over year. Notably, this marked the second successive quarter of positive earnings and sales surprise. As a result, management raised its view for fiscal year 2019. (Read: DICK'S Sporting Beats on Q2 Earnings, Raises View)

We note that, shares of this Coraopolis, PA-based company have increased 9.1% year to date, outpacing the industry’s growth of 1.1%.

Further, analysts are steadily growing bullish on the stock. This is apparent from the rise in earnings estimates. The Zacks Consensus Estimate for fiscal 2019 and fiscal 2020 has moved north by 6 cents and 4 cents to $3.39 and $3.50, respectively.

All said, let’s take a closer look at the aspects driving the company’s performance.

Let’s Delve Deeper

DICK’S Sporting is progressing well with the merchandising strategy, which is all about optimizing inventory to make shelves available for popular and private label brands. Its efforts to improve in-store experience include space reallocation to regionally relevant and growing categories, the rollout of HitTrax technology and batting cages in several stores, expansion of strike point presentations, and investment in product development teams. Further, the company is focused on private brands and is on track to launch new brands as part of its $2-billion sales goal in private brands. These actions will not only improve customers’ satisfaction and inventory turnover but also boost merchandise margin rates.

Moreover, this Zacks Rank #3 (Hold) company has been benefiting from continued focus on developing every possible avenue to generate greater sales. As part of its long-term plan, DICK’S Sporting plans to make significant investments in e-commerce, technology, store payroll, Team Sports HQ and private brands. It also remains on track to build the best omni-channel experience for athletes by strengthening store network and expanding e-commerce presence. This led to e-commerce sales growth of 21% in the fiscal second quarter. E-commerce penetration improved to about 12% of net sales in the reported quarter, up from roughly 11% in the prior-year quarter.

Investments throughout fiscal 2019 will be focused on enhancing in-store experiences for athletes, improving e-commerce fulfillment capabilities, and developing technology solutions to boost athlete experience and employee productivity.

Keeping in these lines, the company opened two dedicated e-commerce fulfillment centers in New York and California. Additionally, it is making efforts to improve digital marketing efforts by strengthening partnerships with Google GOOG and Facebook FB, which should bode well.

Also, the company is on track with store opening plans. In fiscal 2019, it plans to open eight namesake and two Golf Galaxy stores. Of these, it expects to inaugurate seven stores in the third quarter of fiscal 2019. Meanwhile, the company plans to relocate three namesake stores and two Golf Galaxy store.

Further, DICK'S Sporting is on track with the removal of the hunting category from its stores. During the second quarter, the company eliminated the hunting category from nearly 125 more stores (where the category is underperforming). This category was replaced with a more compelling assortment. Backed by these efforts, it generated positive consolidated comparable store sales (comps) growth in the fiscal second quarter. Comps were aided by rise in both average ticket and transactions. This marked its strongest quarterly comps since 2016.

The company now anticipates same-store sales to be up low-single digits in fiscal 2019. Same-store sales had declined 3.1% in fiscal 2018. For fiscal 2019, management expects adjusted earnings to be $3.30-$3.45 per share, up from the earlier guided range of $3.20-$3.40.

Wrapping Up

However, higher shipping and fulfillment costs stemming from strong e-commerce growth remain a threat to margins. The company is witnessing higher SG&A expense due to continued investments in business. The persistence of increased freight costs and other investments should remain a hurdle for margin growth in the near term. Moreover, the increase of tariff on imports from China remains a concern.

Nevertheless, we expect all aforementioned growth drivers to offset these hurdles and help DICK'S Sporting to sustain momentum.

Meanwhile, investors can consider Ulta Beauty, Inc. ULTA, which carries a Zacks Rank #2 (Buy) and has a long-term earnings growth rate of 18.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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