Dick's Sporting Goods (DKS) Falls Hard After Weak Report
Shares of Dick's Sporting Goods (DKS) fell about 25% to 27% after this morning's earnings. The stock had already been sliding, coming off recent highs before the report. Year to date it had roughly tracked the S&P 500, then broke lower in August. The 130 level is support from a couple of years back.
The Numbers
DKS missed on the top and bottom line, and comparable sales came in below expectations too. The bigger blow was guidance. Full-year adjusted earnings were cut sharply to $11-$12 a share, against expectations near $14 a share. Management also trimmed its revenue forecast.
The core Dick's business still holds up. Comparable sales at Dick's stores rose about 4.9%, close to 5%, so the flagship banner keeps growing despite what the company calls a challenging retail environment. DKS kept its outlook for Dick's banner stores, expecting 2.5% to 4% comparable sales growth for the year. It also pointed to broad category strength and a demand boost from World Cup-related buying.
Foot Locker Is the Drag
The acquired Foot Locker business posted a 3.6% drop in comparable sales, which pushed management to lower the outlook for the whole chain. Management blamed a very challenging athletic footwear and apparel market, which forces heavier discounting and leads to weaker product sales. The big earnings cut points to margin pressure and a tougher second half.
This should not be a big shock. Foot Locker was a weak brand for years as a standalone company and was not posting comparable sales growth every quarter. It has not regained momentum even under a new parent. The bull point is that core Dick's stays healthy with nearly 5% comparable growth and steady demand. The bear point is that no one knows when, or if, the Foot Locker deal turns around and adds real value instead of just being a drag. Investors this morning focused on the lowered outlook and Foot Locker weakness over any bright spots.
Broader context: back-to-school season was strong per Walmart (WMT), Target (TGT), and off-price retailers, so DKS gave a contrasting, weaker read. The real question is whether this is a weak overall buying season or just a weak Foot Locker one. My read is a mix of both.
DKS also flagged the industry turning more promotional, with many competitors discounting alongside lackluster product launches. There is simply too much choice for shoppers buying running shoes.
The Trade
The sell-off looks a bit overdone as the stock nears 130. Even with lower guidance and reduced earnings and sales numbers, the valuation is getting cheap after a 25%-plus drop. The setup: go out to December, far out in time, and sell a bullish, slightly out-of-the-money 130/125 put spread, taking in about $2. That means making $2 while risking $3 max, a good return on risk if the stock finds a floor. Pair it with shorter-term monthlies to keep bringing in premium and to hedge while waiting.
Implied volatility has not dropped much after earnings because of the size of the stock move, which adds to the appeal on a valuation basis. Value buyers may step in around this level. If they do not, the premium collected is generous, with plenty of time to hedge and wait.
