Summary
- We are upgrading DKS shares from Neutral to Buy, seeing an upside to the bottom line as a result of furloughing and possible layoffs.
- Online orders and curbside pickups are so far stronger than anticipated.
- We recommend to avoid quarterly or annual guidance in 2020.
Retail stocks are having a challenging time at present, but this doesn't mean that upgrades do not happen. Specifically, in this note we are upgrading Dick's Sporting Goods (DKS) from Neutral to Buy, as we see the company attempting to save the EPS by furloughing most of its employees. In our view, the company is doing best what it can control: managing the bottom line. While the top line itself will remain elusive in the short run, we believe that the revenue potential will remain in the multiple (see Valuation section below).
Company Description:
Dick's Sporting Goods (DKS) is a sporting goods retailer that focuses on equipment, footwear, accessories, and apparel in various retail stores on the East coast of the United States. There is also an e-commerce platform - which is critical in this day and age of coronavirus - that complements brick-and-mortar stores. Dick's Sporting Goods operates under Golf Galaxy, Field & Stream, and Dick's Team Sports HQ brands / platforms.
Reasons Behind the Upgrade:
Targeted Furloughs Preserve the Workforce, While Protecting the Bottom Line in the Interim: Starting April 12, the company furloughed the vast majority of its 40,000+ employees, noting that such a significant labor force is unnecessary for operations of its 800+ stores that remain largely closed. Per the company's statement: "It is our goal that when this crisis subsides, we will welcome back our teammates, open our doors and get back to the business we love of serving athletes and our communities."
Online Orders and Curbside Pickups Are Stronger Than Anticipated: Thus far, we estimate that online and curbside orders have made up for 30%-35% of lost physical in-store sales in March and April. While this is certainly impressive and could eventually result in replacing half of the in-store orders, especially assuming that the stores do not resume their full capacity even by 2021, there is a more important factor at play here. We would actually argue that by becoming a stronger online brand the company may choose to lay off - or not rehire - a sizable percentage of its workforce, once full capacity is restored. Like many other stores, such as Best Buy, Dick's is being forced to becoming more active online. It is baptism by fire and we expect it to work well for DKS.
