The benefits stemming from the demise of The Sports Authority (TSA) earlier this year have taken some time for other sports apparel retailers to fully recognize, but Dick's Sporting Goods (DKS) is finally starting to reap those rewards, according to analysts at Oppenheimer, who raised DKS's rating on Thursday to Outperform with a $75 price target.
The firm's upgraded outlook comes after months of cautious observation of the sports-retail sector. Oppenheimer was skeptical about whether Dick's could take full advantage of TSA's bankruptcy. Those concerns have abated slightly, though the firm still believes that there are underlying issues with Dick's.
"Clients should not interpret our upgrade of DKS as some type of longer term, 'all clear' call for the company. That said, we are increasingly optimistic that despite continued underlying woes for Dick's, the company should effectively capitalize upon a building wave of freed-up market share within the group," Oppenheimer analyst Brian Nagel wrote.
The firm noted that over the past several months both TSA and Sports Chalet have filed for bankruptcy and closed over 500 retail locations. Meanwhile, earlier this week fellow sports retailer Golfsmith also filed for bankruptcy and announced that it will be shuttering some of its 100 stores in the U.S. While the closure of these stores could allow Dick's to gain market share, they also reflect the fundamentally challenging nature of the retail sector.
Real Money's Jim Cramer sees Dick's as a last man standing play and sees a lot of overlap between Golfsmith's and Dick's offerings. During a segment on CNBC's Squawk Alley Thursday, Cramer said that while competition from Growth Seeker holding Amazon (AMZN) has taken out the competition, there is still room for at least one bricks-and-mortar sporting goods retailer, and Dick's is emerging as that option.
Oppenheimer also raised its earnings per share expectations for the fiscal year (ending January 30) to $3.02 from $2.90, still below Wall Street's consensus $3.04, reflecting its still-cautious approach to Dick's. However, next fiscal year's EPS estimate was also raised, to $3.75 from $3.15, ahead of Wall Street's $3.69 consensus. Part of the reason for the upgraded outlook is the delayed benefit from the exit of some of Dick's rivals.
"For a long while, we have maintained a rather cautious stance on DKS, upon concerns of challenges within the Sporting Goods sector and, in our view, a less-than-optimal capital deployment strategy at the chain," Nagel wrote.
Since Dick's jumped following its strong earnings release a month ago, it has been stuck in a tight trading range just below $60, suggesting investors also either don't have confidence in Dick's specifically or the sports-retail environment in general. But while Oppenheimer does not have much confidence in the sector, it does have some confidence in Dick's ability to garner market share.
"Our shorter term positive call on DKS reflects our view that despite still meaningful underlying woes for Dick's, the company should effectively capitalize upon a building wave of freed-up market share within the group and belief that despite the move higher in DKS lately, shares still do not fully discount for prospects for potentially better sales trends nearer term," Nagel wrote.
Dick's still has the support of top vendors such as Nike (NKE) and Under Armour (UA) (part of TheStreet's Trifecta Stocks and Growth Seeker portfolios, respectively) amid dwindling channels for those apparel makers to sell their products. The inventory that consumers want mixed with a sudden lack of competitors makes Dick's near- and mid-term prospects look bright.
Now might be the time to get in on the wave before it gets too high, according to Cramer and Oppenheimer.