One change this week to our Position Monitor -- adding Dick's Sporting Goods (DKS) Short-Side to our Short Bias list.
On the re-opening phase DKS was a big wallet share winner. It’s the only place where you can get all kinds of outdoor gear, backyard games, golf equipment, comfy work from home athleisure wear, and home fitness goods. As stimulus dollars hit US households, sporting goods/hobby stores in US retail went from -45% in April to +22% in June, outperforming total retail each month since May as July was up 18% and August up 11%. But that trend and outperformance is clearly slowing, sporting goods stores saw the biggest month over month % decline (-6%) in August of any retail category, and as we head towards winter, the only category likely to remain well elevated we think is home fitness. Home fitness is a category that has seen new distributors like BBY, and several big online direct players. That likely means the recent comp slowing continues and therefore some pressure on what kinds of multiple the market will want to assign. SG&A should accelerate as sales slow given the return of some expenses and labor costs. As we look towards 2021, there is excitement around the potential for golf sales in spring, but consumers are well stocked on other key categories after this year, and we think the consumer is likely to be facing discretionary spending pressure, that didn’t really happen so far in 2020. There might be another quarter of upward revisions, but we think the positivity is nearly priced in here, CEO Ed Stack might agree with some larger stock sales hitting the tape in recent weeks. A couple other items we are watching are weather, this early blast of cold should be a positive for winter apparel sales, which is an important category for DKS, so we’ll see how weather shapes up in the meat of the fall. Also the Academy IPO could happen in 4Q, we’re not sure if that should be a bullish or bearish event for DKS, but if Academy gets bid up around IPO excitement, DKS should probably trade at a premium to its competitor. Short interest stands around 21%, but there should be about 7pts of convert delta hedging in there so the underlying number is more reasonable (and well below last year's peak of 35%).
