Dick’s Sporting Goods Earnings: Rare Setback Highlights Industry Challenges; Shares Overvalued

No-moat Dick’s Sporting Goods suffered a second-quarter profit miss and cut its full-year non-GAAP EPS guidance to $11.50-$12.30 from $12.90-$13.80 previously. While the firm stressed that consumer demand for its products remains strong, investors viewed the report very negatively, sending its shares down about 24%. We think investors and analysts had overestimated Dick’s competitive position after three years of strong results, leading to overvaluation. Moreover, even after the sharp decline, Dick’s continues to trade above our $92 per share fair value estimate, which we do not expect to change materially. While shares may appear inexpensive by traditional valuation metrics, we cannot support a more aggressive valuation as we believe Dick’s operating margins will decline from the low double digits at present to around 7% over the next decade.