Dick’s Sporting Goods Q2 Earnings Release & Rating

Dick’s Sporting Goods Q2 earnings (NYSE: DKS) came out today, and the stock is down roughly 22% in intraday trading. However, the results are not nearly as bad as one would think given the stock’s price action. For the second quarter of 2017, Dick’s Sporting Goods reported diluted EPS of $1.03. Compared to the diluted EPS of $.82 reported for the second quarter last year, this represents a 25.61% increase. Likewise, consolidated same-store sales for the second quarter increased 0.1%. In addition, the company repurchased $143 million in share buybacks this quarter.

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Furthermore, revenue rose 9.6 percent year-over-year to $2.157 billion. However, analyst consensus estimates for revenue were $2.161 billion. The company missed this revenue estimate by about $4 million. Regarding guidance, Dick’s Sporting Goods now expects adjusted EPS between $2.80 and $3 this fiscal year. Analyst consensus estimates were for adjusted earnings of $3.09 per share.

CEO’s Statement Regarding Dick’s Sporting Goods Q2 Earnings

Despite decent performance this quarter, investors learned the company is declaring war on prices to defend market share and protect private-label brands. In the conference call with analysts, Dick’s CEO made the following statement:

We are intentionally joining the battle, and we will aggressively be promoting our business to drive market share to our stores and online. By design, we will be more promotional and increase our marketing efforts for the remainder of the year, as we will aggressively protect our market share. We have updated our outlook to reflect these investments. We continue to believe retail disruption creates opportunities for us as we look long-term. Edward Stack, CEO, on Dick’s Sporting Goods Q2 Earnings Call

In contrast to the strategies of other retailers, the company plans to open 43 new stores by the end of 2017. Dick’s Sporting Goods believes this current aggressive growth strategy will give it a long-term competitive advantage.

Market Reaction to Earnings & Conference Call

At the time of this article, shares of Dick’s Sporting Goods are down over 22%. Clearly, there is an unprecedented concern for the future of the retail industry. Many of Dick’s competitors experienced pressure in their stocks today. For instance, Big 5 Sporting Goods (NASDAQ: BGFV) dropped 7%, Cabela’s (NYSE: CAB) dropped 4.9% at one point, and Hibbett Sports (NASDAQ: HIBB) dropped over 16.5%. To an extent, this makes sense. Pricing wars are industry-level phenomena, and Dick’s newfound commitment to a pricing war spooked investors.

Stock Rating After Dick’s Sporting Goods Q2 Earnings

While it is healthy for investors to scrutinize extremely competitive industries like retail, we believe today’s price action in Dick’s Sporting Goods stock is an overreaction. Although it missed analyst expectations, the company’s financial performance still improved on a year-over-year basis. Furthermore, the dividend yield on DKS stock is over 2.5%. We believe the likely overreaction to Dick’s Sporting Goods Q2 earnings offers a good entry point for long-term investors. This is a typical value play, and it will take time to work out.

Therefore, we are adding DKS stock to our Bullish List. To hedge this position, we are setting this up as a pairs trade with a short leg on SPDR S&P Retail ETF (NYSEARCA: XRT). The XRT ETF will be added to our Bearish List. Please note, this is not a good trade for technical traders to initiate a long position given the bearish trend. We will tag the long and the short with a note that this is a pairs trade for a value investing long position on DKS.

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