Is Dick's Sporting Goods Topping Out?

NEW YORK ( TheStreet) -- Shares of Dick's Sporting Goods ( DKS) led the percentage gainers list on the New York Stock Exchange on Tuesday following a strong quarterly report, prompting some skepticism on Wall Street about how high the stock can go from here.

"While the results and the outlook were certainly better than we expected, the upside for the stock at its current level is limited," said Sterne Agee in a late-session note to clients. The firm lifted its earnings estimates on Dick's but kept a neutral rating on the stock as it believes competitors Hibbett Sports ( HIBB), Finish Line ( FINL), and Foot Locker ( FL) "will all post far better results and are all trading at more attractive multiples than DKS."

The stock finished Tuesday up $3.59, or 12%, at $33.51 on volume of 8.5 million, almost eight times the issue's trailing three-month daily average of 1.1 million. Year-to-date, the shares are now up 20% with Tuesday's session high of $34.18 representing a new 52-week peak. At current levels, the stock is now more than 10% above both its 50- and 200-day moving averages of $29.16 and $27.48, respectively.

The driver for the buying was third-quarter earnings that came in more than 30% ahead of consensus analyst expectations along with second-consecutive increase in the company's full-year adjusted profit forecast.

Before the opening bell, Dick's reported non-GAAP earnings of $26.7 million, or 22 cents a share, for the three months ended Sept. 30, well ahead of its forecast for a profit of 15-16 cents a share in the period, and a nickel beyond the average estimate of 25 analysts polled by Thomson Reuters. It was at least the ninth straight quarter that Dick's has topped Wall Street's consensus profit view.

Sales jumped 9% in the third quarter to $1.08 billion, Dick's said, driven by a 5.1% increase in same-store sales and new store openings. The same-store sales growth was seen across the board as the namesake stores posted a 3.8% increase, and the Golf Galaxy business said comps rose 2.4%. E-commerce sales soared 82.4% quarter-over-quarter.

Citing the strong performance, Dick's lifted its view for the full year, forecasting a non-GAAP profit of $1.56 to $1.58 a share, up from a prior projection of $1.46 to $1.49 a share. It now sees fourth-quarter adjusted earnings of 69 to 71 cents a share vs. the current average analyst estimate for the December quarter for a profit of 68 cents a share.

Wall Street was already split on the stock ahead of the report with 11 of the 25 analysts covering it at either hold (10) or underperform (1), and Sterne Agee wasn't budging after pouring over the numbers. Aside from its concerns about valuation, the firm cited its own concerns about the decision by Dick's to move to an open-stock model for its footwear sales, and said it believes the company will need to make an acquisition to meet its long-term growth targets.

"Despite the strong initial reaction to the shared service (open stock) footwear model, we continue to doubt its long-term viability due to shortage implications and the reduced personal service levels," Sterne Agee said.

With regard to what it termed Dick's "predatory stance," the firm added later: "Four of the 12 stores opened in 3Q were in the same neighborhood as a TSA The Sports Authority ( TSA) store, and 2 more were within 4 miles. We do not see enough white space for Dick's to open another 463 stores, and reach its target of 900 without an acquisition."

From a valuation standpoint, Dick's shares are now trading at 19.6X the current average analyst estimate for its fiscal 2011 earnings. That compares to 12.3X for Finish Line, 15.6X for Foot Locker and 16.2X for Hibbett.

Finish Line is expected to report its results for its fiscal third quarter ending this month on Dec. 21, while Foot Locker's third-quarter numbers are due on Thursday and Hibbett is slated to report on Friday.

Analysts are looking for a profit of 17 cents a share on sales of $1.22 billion from Foot Locker, and earnings of 38 cents a share on sales of $161.6 milliion from Hibbett.

-- Written by Michael Baron in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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