DKS - Exceedingly Mediocre

Takeaway: This story defines ‘uninspiring’. But expectations are finally at a level where it won’t define ‘disappointing’.

This DKS Analyst day was a slight net positive as it relates to our view on the stock. To be clear, we headed into this meeting with a short bias as we thought growth and profitability expectations were too high – which concerned us at an 18x multiple and a 17% run year-to-date (39% since Oct). We still think that there are cyclical challenges as DKS grows into more competitive geographic markets as its model matures, and the only growth in the financial model comes from a margin-dilutive channel where DKS structurally has a permanently weaker competitive edge (online). 

 

That said, consider the following:  1) the company finally took down its store growth targets to a realistic level (our math had always said that over 800 stores without a big hit to profitability was a pipe dream), 2) it issued long-term comp guidance of a mere 2-3% -- when e-commerce growth alone accounts for 2-3% (i.e. it’s guiding for store comps to be flat to down), and 3) it guided to 110bp in margin improvement over 3-years. Though e-commerce is margin dilutive, our math suggests that the net effect of the weakness in golf and hunting alone hurt margins last year by about 100bp, which is obfuscated in the company’s disclosure.

 

We can beat the company up all day about how its current view of 2017 is so much weaker today than at its last meeting in 2013 (’17 revenue now $8.8bn vs prior $10bn, and margins 9.2% vs 10.5%) but that’s water under the bridge at this point. Does valuation make sense here? No. But it doesn’t make sense for most other maturing big box retailers, either. What we can say is that this is the first time in a while where we actually have a decent degree of confidence that DKS won’t miss.

 

Don’t mistake this as us getting behind the story. But we’re not leaning on it anymore, either.

 

 


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