Retailers have taken it on the chin recently. One retailer to put on your screen as a potential short candidate is Dick’s Sporting Goods (DKS). The company has been a darling specialty retailer since it came public in 2002 at a spilt adjusted $6 per share. But yesterday, the company reduced its earnings guidance from $1.82-$1.87 to $1.70-$1.75 because of problems with a recent acquisition. While this in itself is not a horrendous shortfall, the stock was priced for perfection and therefore gapped down from the high $30s to the low $30s.
From a fundamental perspective, problems with a poor acquisition are hardly ever just "one quarter events," in my experience. Management’s time and attention are often diverted for several quarters as they go about fixing the problems, leaving the rest of the business to run on auto-pilot. This distraction often leads to additional problems in future quarters.
From an investment perspective, the stock now finds itself in "no-man’s land" – it cannot be classified as a growth or a value stock. At $32, the stock is still trading at over 18x revised 2005 earnings guidance, which is relatively expensive for a retailer that only grew combined revenues at 4% and reported comparable store sales of 0.5% this past quarter. Institutional growth stock managers could continue to sell the stock and value investors probably won’t find the stock attractive until it trades below 15x earnings, or under $27.
I expect any rallies in the stock will present an opportunity to go short for a trade. DKS is a weak stock in a weakening sector. The weekly chart shows the stock has fallen back into the triangle consolidation from which it broke out. In addition, the first significant support doesn’t come into play until the stock tests the $26 – $30 range.
