When Sports Authority first announced that it was closing 140 stores and filling for Chapter 11 bankruptcy protection in early March, some industry analysts watched to see which of the company's competitors would be the one to pick up the pieces.
"I think this will be very good for Dick's Sporting Goods as well as Trifecta Stocks holding Foot Locker (FL)," said Trifecta Stocks co-manager Christopher Versace at the time. "As we saw when Borders and Circuit City fell, consumers will move to other locations, not forego spending."
The concern for other analysts, however, was that discounts related to the store closings would poach customers away from competitors.
Six weeks later, Dick's Sporting Goods (DKS) has emerged as one of the main beneficiaries to Sports Authority's restructuring, according to Canaccord analyst Camilo Lyon. The firm reiterated its Buy rating while increasing its price target to $52 from $50.
This upgraded view on Dick's is a result of the firm's store checks on Sports Authority, which showed that discount promotions are running between 10% and 30% off everything over the past month.
"We do not view this level of promotions as egregious, and thus believe the negative impact to neighboring DKS stores has likely been limited thus far. Furthermore, DKS has been active in marketing to TSA reward members via coupons and promotions of its own to spur new customers," Lyon said.
The sports retail industry as whole is experiencing a prolonged downturn as evidenced not only by Sports Authority's demise, but also the recent news that Vestis Retail Group, which owns Bob's Stores, Eastern Mountain Sports and Sports Chalet, is close to also filing for Chapter 11 protection.
Not to mention the fact that Sports Authority has also been put up for sale amid its bankruptcy restructuring, though Lyon does not believe that it will find a buyer before its previously announced April 21 deadline.
Canaccord is expecting industry headwinds to affect Dick's bottom line when it reports on May 17. The firm currently has an earnings estimate of $0.49 per share for the current quarter compared to the $0.53 per share it earned in the year-ago period. However, the spring quarter is expected to be much better, with earnings jumping to $0.78 per share (vs. $0.77 per share a year ago).
The firm's view is that Sports Authority closures will have more of a material impact on Dick's in the second half of the year, and could add as much a $379 million in sales, or $0.86 in EPS, on an annualized basis.
"Recall, management embedded no upside from the TSA closures in its 2016 EPS guidance but did include the associated incremental marketing expenses around customer acquisition," Lyon wrote. "The TSA (Sports Authority) comparable store/EPS tailwind coupled with an easier Q4 comparison (-2.5% in 4Q15) sets up well for a strong back-half acceleration for DKS."
The benefits from the demise of its rival won't be apparent in the upcoming quarterly release, but the second half results should reveal the spoils of victory, according to Canaccord.