Sporting goods retailer Dick’s Sporting Goods (NYSE:DKS) is set to report third-quarter 2019 numbers before the bell on Tuesday, Nov. 26. I’m cautiously optimistic on DKS stock heading into that print for two big reasons.
First, my research suggests that those numbers should be pretty good. Specifically, foot traffic, web traffic and search interest data for Dick’s Sporting Goods all point to strong sales growth in the quarter, as do macroeconomic retail sales data and peer company earnings reports. At the same time, certain market developments imply that margin performance was strong in the quarter, too. Strong sales and margin performance should inspire confidence in DKS investors.
Second, given the underlying valuation, pretty good numbers should be enough to provide a nice post-earnings lift to DKS stock. That is, DKS stock is cheap and fundamentally undervalued, given concerns regarding the staying power of the business. Strong third-quarter numbers heading into the holiday season will significantly ease those concerns. As those concerns fade, so will the undervaluation in DKS stock.
Big picture: DKS stock looks good heading into the third-quarter earnings report.
Dick’s Could Report Good Numbers
My research suggests that Dick’s Sporting Goods had a pretty good third quarter.
It is important to note that Dick’s Sporting Goods has been on a roll this year. Although the past several years have been defined by choppy comparable-store sales growth, erratic margins and declining profits, this year has been much different. In 2019, comparable sales growth has been largely positive, including a multi-year high 3.2% rise in comparable sales last quarter. Margins have been stabilizing. So have profits.
In other words, Dick’s Sporting Goods had solid momentum heading into the third quarter.
Multiple data points suggest this momentum persisted in Q3. First, foot traffic data shows that Dick’s foot traffic has increased 4.5% year-over-year through the first 10 months of 2019, including healthy growth over the past few months. Second, web traffic data from SimilarWeb shows that Dick’s website has gained traffic share against other sporting goods websites over the past few months. Third, search interest data from Google Trends shows that search interest related to Dick’s Sporting Goods has consistently increased year-over-year in 2019.
These data points are corroborated by a healthy consumer backdrop (unemployment rates remain near historic lows, wages are still rising, inflation remains checked and retail sales ex-food sales rose 3.7% year-over-year during the past three months) and strong peer company earnings reports. Nike (NYSE:NKE), Lululemon (NASDAQ:LULU), Skechers (NYSE:SKX) and Foot Locker (NYSE:FL) all reported strong revenue numbers in September, October and November.
The data strongly implies that Dick’s is due to report strong third-quarter numbers before the bell on Tuesday.
Dick’s Stock Could Rally
Importantly, strong third-quarter numbers should propel a nice rally in DKS stock.
DKS stock presently trades at just 11.1-times forward earnings. That’s dirt cheap. The market trades at over 16-times forward earnings. Retail and consumer discretionary stocks trade at over 20-times forward earnings. Footwear stocks — and Dick’s generates a lot of money from footwear — trade at nearly 30-times forward earnings.
Across the board, DKS stock is undervalued relative to peers. This undervaluation is a byproduct of investor concerns regarding the staying power of Dick’s in the dynamic athletic apparel retail landscape. Specifically, athletic apparel brands like Nike have been making a huge direct retail push, and in so doing, have lessened their reliance on wholesale distribution partners like Dick’s Sporting Goods. Some investors are concerned that this eventually results in Dick’s becoming irrelevant in the athletic apparel distribution model.
But, strong numbers in 2019 have helped alleviate those concerns, as Dick’s sales and margin trends appear to be stabilizing amid this dramatic shift. Stabilization has inspired investor confidence. Year-to-date, DKS stock is up nearly 30%.
Strong third-quarter numbers will continue this alleviation. Considering DKS stock is still dirt cheap, continued alleviation should keep the 2019 rally in DKS stock alive.
Bottom Line on DKS Stock
Multiple data points suggest that Dick’s Sporting Goods is due to report strong third-quarter numbers before the bell on Tuesday. At the same time, DKS stock is trading at a dirt cheap valuation heading into that print.
That’s a favorable combination which ultimately implies that DKS stock could be due for a nice post-earnings bump.
As of this writing, Luke Lango was long NKE, LULU, SKX and FL.