Nothing came from the numbers or the conference call that dissuades us from being short this stock. Yes, it was an in-line print, which is a slight victory for a company that has missed four of the past eight quarters. But 9% revenue growth deleveraging to 1% EBIT growth is anything but impressive. In fact, the two categories that are hurting the comp the most – guns and golf – are two of the categories where Dick’s Brick & Mortar stores should have the best competitive advantage (ie you don’t buy a Mossberg 12-guage or a $500 Taylor-Made driver on Amazon). Our point here is that DKS is adding new stores because it could – not because it should. Current store count is 691, and management will continue to march toward 1,100. That’s a bad idea. We think that the company should stop growing and change up its financial model to maintain its footprint and buy back stock. But that’s not what it will do.
We think that near-peak gross margins can’t co-exist for long with peak productivity and a trough SG&A ratio. In fact, the company leveraged SG&A this quarter by 40bps on only a 1% comp. That’s not sustainable. We understand that this is a ‘best in breed’ company, but so is Macy’s, and we wouldn’t touch that one either. We’ll see where consensus numbers shake out over the next few days to determine how loud we should get on the short side.
