Kicking Around Dick's Sporting Goods

 | Mar 06, 2012 | 10:00 AM EST
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The news was largely known on Dick's Sporting Goods (DKS) following its January markup in its earnings guidance. The stock traded up nicely in the weeks after, and made today's earnings release a classic "sell the news" event (which is what is happening). However, does the market really know and appreciate the fundamental positives unfolding at Dick's? The combination of the below factors has me warming to a "buy on weakness" strategy.

Despite increased markdowns to clear through cold weather gear during an abnormally warm winter quarter, the company's gross margin expanded year over year. This suggests to me that there is pricing power in many other merchandise categories and good cost leverage (as seen in the fact that Dick's had a same-store sales decline in the quarter and considering e-commerce investments). Remember, the company's supplier base has pushed serious price increases onto the plates of the distributor base, so to see Dick's being able to hold its prices, and even pass them along to consumers with success, is music to my analytical ears.

In e-commerce, Dick's 50% year-over-year sales gain was virtually the strongest of the large-box retail peer group from the holiday quarter. If you imagine the physical store layouts and online selection of Target (TGT) and Wal-Mart (WMT), etc. in sports gears, clearly Dick's remains the go-to destination. Being a go-to destination (for hot categories with pricing power no less, such as those from Under Armour(UA) and Nike (NKE)) is critical in an industry that is being uprooted by Amazon (AMZN) as well as enhanced iPad app shopping capabilities by all sorts of retailers.

The company's clearance inventory fell 2.1% year over year, which was quicker than the drop in same-store sales. It was important to see that Dick's is entering the spring season with clean inventory at a time of favorable weather early on.

In this sector, derivative names to watch include Callaway Golf (ELY) (Golf Galaxy business for Dick's had a very strong same-store sales increase of 9%, and recent marketing for the Callaway brand while weird, is showcasing some quality technology from the company), and obvious names such as Nike and Under Armour. In addition, Wolverine World Wide's (WWW) Merrill running shoe brand has some good placement, and is the strongest brand for the company. Southwest Casino (SWCC) (doesn't sell its major firearms to Dick's, but it has a presence in less obvious items, such as knives) and V.F. Corp. (VFC) is a high-quality name with a North Face brand that was a solid performer in the quarter.

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