Admittedly, Dick's (DKS) first-quarter update raised more questions than answers, with softer-than-expected top-line results, upcoming competitor liquidation disruptions, plans to slow store openings, and discussions about reducing its expense structure to fund future growth clouding one of the few positive growth stories in the retail sector today. We understand and appreciate the market's concern with this stock--namely with so much carnage across the retail category due to Amazon and vendors' own direct-to-consumer efforts, what's to prevent Dick's from suffering the same fate? While these risks shouldn't be taken lightly and we still view Dick's as a no-moat company, we ultimately believe an emphasis on performance goods (most notably in-store premium footwear decks, which don't have much overlap with Amazon), improved online sales capabilities, an expanded private label assortment, and youth sports emphasis are enough to put it on the list of retailer survivors the next 10 years.
We're planning to reduce our $62 fair value by about 10% to account for the softer sales outlook (full-year comps are expected to increase 1%-3% versus earlier expectations of 2%-3%, partly attributed to Camping World's decision to close half of the Gander Mountain stores it recently acquired) and new store opening plans (management plans to slow store openings to 5-10 locations by 2019), offset somewhat by lower corporate tax rate assumptions starting in 2018 (our full-year adjusted EPS forecast will remain aligned with the midpoint of guidance calling for $3.65-$3.75). We believe our updated longer-term assumptions, including low- to mid-single-digit top-line growth and operating margins remaining in the 7%-8% range the next 10 years (compared with 7.4% this year), strike a balance between retail industry structural changes and the company's various strategies. While fundamentals will likely be uneven the next few quarters, we believe the market has excessively punished this name.
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