Earnings preview: Weak outlook makes Dick’s Sporting a risky bet ahead of Q3 report

Dick’s Sporting Goods (DKS) is probably heading for a weak holiday season, with sales being dragged by softening demand for some of the leading brands. The outlook is not very encouraging ahead of the company’s earnings report for the third quarter of 2018, to be released on November 28 before the market opens.

Analysts forecast a 4% dip in comparable store sales and a 3.6% fall in revenues to $1.87 billion for the October quarter, which is expected to drive earnings down 13% to $0.26 per share. The sporting goods retailer usually comes out with better-than-expected results, but this time the stock might fall even if the results beat the forecast. Such a possibility, combined with the below-average stock price, calls for caution before buying Dick’s Sporting.

Analysts forecast a 4% dip in comparable store sales and a 3.6% fall in revenues to $1.87 billion for the October quarter

However, a section of analysts maintains their positive outlook on the company, without any downgrade or price-cut, considering its strong fundamentals. Though the average rating is neutral currently, it is much below the ratings the company enjoyed a few months ago. Meanwhile, the entire sector is currently passing through a challenging phase – the leading manufacturers prefer either their own outlets or online channels like Amazon (AMZN) to push the products.

The long-term prospects of Dick’s look bright, benefitting from higher margins due to the successful execution of the management’s merchandising strategy that mainly involves inventory optimization. The other positive factors are the steady pick-up in digital sales, amid aggressive e-commerce push, and the ongoing efforts to streamline store operation.

Lower-than-expected sales send Dick’s Sporting Goods crashing

The company’s second-quarter results were hit by lower store traffic, with revenues staying almost flat at $2.18 billion and missing estimates. Comparable store sales dropped, while higher margins pushed up earnings beyond estimates.

Among rivals, Foot Locker (FL) reported a marked increase in third-quarter comparable store sales earlier this month. Adjusted earnings rose 9% while revenues dropped, but at a slower pace than expected. The overall improvement can be attributed to the stable demand for the Nike (NKE) and Adidas brands.

Dick’s Sporting’s shares have gained steadily since last year, outperforming the industry, after plunging to an eight-year low. The stock started losing momentum ahead of the holidays this week, after growing about 13% since the beginning of the year.

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