The margin expansion opportunity for this specialty retailer will become more apparent as 2017 progresses.
By R.J. Hottovy, CFA | 03-07-17 | 10:58 AM | Email Article

 Dick's  offered rare bright spots in what has been a challenging fourth-quarter retail reporting season, with comps of 5% coming in toward the high end of its 3%-6% outlook (alleviating fears about a shortfall due to warmer weather trends) and EPS that exceeded management expectations ($1.32, versus an outlook of $1.19-$1.31) after excluding write-downs for inventory not aligned with its ongoing merchandising strategy, store closing charges, and The Sports Authority and Golfsmith integration costs. Admittedly, management's first-quarter adjusted EPS outlook fell short of market expectations ($0.50-$0.55 per share, versus consensus estimates of $0.61) and is likely weighing on shares today, but also includes $10 million in incremental costs due to digital investments and front-loaded store openings. As such, we believe investors should instead focus on the full-year numbers--including comps of 2%-3% and adjusted EPS of $3.65-$3.75 (representing 15% growth)--which strike us as realistic and implies Dick's is one of the few retail growth stories in 2017.

R.J. Hottovy, CFA, is a consumer strategist for Morningstar.

While investments are likely front-loaded and guidance only suggests modest margin expansion versus full-year 2016 adjusted operating margins of 7.1%, we believe Dick's margin expansion opportunity will become more apparent as 2017 progresses. While details are still developing, we see the merit in Dick's vendor consolidation plans, where the company will eliminate as much of 20% of its vendors and replace their products with more exclusive products from existing top 10 vendors as well as Dick's own private label products (where management expects $1 billion in contribution this year), both of which have positive growth and margin implications. We continue to see a path to operating margins in the 9% range the next five years that the market has not priced into the stock at this point. We're not planning material changes to our $62 fair value estimate and view shares as undervalued after today's pullback.

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R.J. Hottovy, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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