DKS: Not Much Room For Error

Takeaway: Nice print from DKS. But don’t chase it. The space should buoy the fundamentals. But NKE, FINL, FL are better buys. UA is better to sell.

We were asked several times today if we’d chase DKS on today’s print. The answer is No. In order to buy it here we need to be able to argue a sustainable 5-7% comp growth rate over the next 2-3 quarters to get to the earnings upside needed to justify a $50 stock. Recall that with DKS’ prime locations and escalating rent minimums, it generally needs a 3-4% comp without excessive discounting to leverage occupancy costs.


While we wouldn’t buy it, we wouldn’t short it, because the fundamentals of the athletic space in the US are simply too good, and should continue to be that way through at least the first half of 2013. As it relates to DKS, the times investors have really made money long and short have been when the company’s comp performance has deviated meaningfully from these levels. It’s quite difficult to argue either of those right now. Yet, at least.


With the completion of this year, DKS is likely to complete the best 3-year comp run in its public history. The only period that comes close was ’05-’07 – but that was a) a relatively solid economy, and b) just after its top competitor (Sports Authority) was just taken private and handed market share to DKS. Are we going to tack on ANOTHER year – especially when Golf Galaxy is going against some particularly hard compares? We’d consider it…but our concern is that the consensus is already there.

 

Yes, there’s more than just comps. We know that. The company is getting more efficient, it is doing a better job branding itself with key vendors, and dot.com just put up a 47% growth rate albeit off a low base accounting for ~2pts of top-line growth (though the 2-year change held steady vs 2Q levels). Also, DKS just put in its new AZ DC that should facilitate another 300 stores (50% growth from here). That is not to say that we NEED 900 stores, but the company can certainly get them if it so chooses. But at 17x next year’s earnings, would we rather own DKS, NKE, or RL? You can pretty much take your pick (within a point or so). That’s a no brainer for us. We’ll take content over distribution in this space in a heartbeat.


We’d look elsewhere – specifically NKE, FINL and FL – in that order for long  exposure here. If you have to short something, we’re still compelled to hang on to our UA short thesis here – as the company is going to incur some near-term pain in order to achieve the longer-term share gains that we definitely think will come.


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