Dick’s Sporting Goods: Price War Looming

Forward View is cutting Dick’s Sporting Goods to a Sell and we’re reducing our price target to $25 a share (from $51). Dick’s CEO Ed Stack described sporting goods retailers as “panicky” and “irrational.” He said that margins might never recover due to the ongoing upheaval in retail. Mr. Stack also noted that additional “consolidation” (read: bankruptcy filings ) will occur in the sector. Finally, he declared that Dick’s Sporting Goods will compete on price throughout the impending sporting goods retail “war.”

We’re ultimately struck by how quickly the management team’s outlook shifted from cautious optimism to assuring investors that no further capital would need to be raised. The company’s executives have clearly been shaken. It’s obvious that the bottom fell out of the market for companies like Cabela’s (NYSE: CAB) and Hibbett Sports (NASDAQ: HIBB), both referenced during the conference call, and they’ve responded by slashing prices. When two major retailers in a space throw up their hands and eviscerate margins, other retailers are bound to follow in order to avoid losing market share. Dick’s Sporting Goods has fought to be a premium sporting goods retailer with enough exclusive merchandise, private label brands and quality service to avoid the pressure facing other competitors. It’s clear that such a strategy wasn’t sufficient. Dick’s doesn’t have a reputation for value nor is the company’s footprint designed to be lean. We thus anticipate that Dick’s will face innate challenges while moving to offer price matches and significant promotions. The company’s employees may need to be pulled, kicking and screaming, into this new reality. We noted that several analysts wished Dick’s management team “good luck,” almost like you would do to someone about to have difficult surgery or facing a dangerous journey ahead. Forward View certainly doesn’t intend to write an obituary for Dick’s Sporting Goods, although some of the company’s competition might want to examine their corporate wills. Ultimately, we don’t want to repeat our bullish mistake, hence the Sell rating. Face it: The retail environment has permanently changed. Old ideas, patterns, plans and data now have extremely limited value for retailers and analysts. The paradigm shift will be reinforced this week by Sportsman’s Warehouse (NASDAQ: SPWH) on Thursday and Hibbett Sports on Friday. The latter earnings report might make Dick’s results/guidance look sunny by comparison. It’s hard to imagine e-commerce newbie Hibbett Sports excelling in this new world.