Option Trade 
Dicks Sporting Goods Inc. (NYSE:DKS) Puts
 Monday, March 06, 2017

** OPTION TRADE: Buy the DKS APRIL 21 2017 50.000 put at approximately $2.00. Place a pre-determined sell at $4.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.80.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey

The retail trade data from Sporting Goods, Hobby, Book and Music Stores have been weak of late.

On a year over year basis, industry sales were down 5% in December and down .83% in January.

This retail trade data includes non-sporting goods related stores, so that needs to be taken into consideration. However, given both the weak sales trends from this data coupled with the closings and bankruptcies of other sporting goods stores, there definitely appears to be some pain out there in sporting goods.

And, Dicks Sporting Goods Inc. (NYSE:DKS), an omni-channel sporting goods retailer offering an assortment of sports equipment, apparel, footwear and accessories in its specialty retail stores in the eastern United States, is in the center of this situation.

Dick’s Sporting Goods will report its quarterly numbers before the market opens on March 7. The company is expected to post fourth-quarter earnings of $1.30 per share, up from $1.13 during the same period last year. The stock is down 4.2% on the year.

DICK’S remains prone to macroeconomic hurdles and stiff competition from other sporting goods retailers, which weigh upon the company’s performance.

Furthermore, an adverse movement in foreign currency exchange rates might dent the company’s operational performance.

Dicks Sporting Goods Inc. has a 12-month low of $37.96 and a 12-month high of $62.88. The company’s 50-day moving average is $51.25 and its 200-day moving average is $56.13. The company has a market capitalization of $5.90 billion, a price-to-earnings ratio of 18.12 and a beta of 0.65.

Influencing Factors to Consider               

The sporting goods sector has been hurting. Sports Authority, which had 450 stores, closed them all in 2016. But even so far this year, we're seeing another slew of bankruptcies.

Michigan based sporting goods retailer MC Sports, which has 68 stores and 1300+ employees filed for bankruptcy this month.

In a USA Today article, it citied the CEO and 86% owner of MC Sports, Bruce Ullery, as saying in a court filing, "the rapid migration of sales from traditional brick-and-mortar retailers to online resellers" and "changing consumer preferences" contributed to the company's failure.

Another sporting goods store in the news for potentially filing for bankruptcy is St. Paul Minnesota based Gander Mountain. They have 160 stores nationwide.

As these stores close up, they are likely to be liquidating their inventory at rock bottom prices and that could very well cut into Dick's sales in the very near term.

For perspective on the current state of Dick's Sporting Goods business, in the most recent 3rd quarter conference call on November 13th, CFO Lee Belitsky provided some guidance for the 4th quarter ending December 31st that are to be announced sometime in early March.

Guidance for the 4th quarter was:

Fourth quarter operating margin is expected to increase slightly at the higher end of our comp guidance range and decline towards the lower end of our range. Within this we expect gross margins to increase and SG&A expenses to de-leverage.               

He basically left investors with a fairly wide earnings range of 12 cents per share. Another way of looking at it is $1.25 +/- 4.8%.

At the same time, same store sales expectations were also on the wide range of 3%-6% increase.

On the day of the report, shares dropped from having traded over 62 the day before to just over 54. Soon after they recovered back to 62 again; but have since fallen out of favor as per the chart above for more perspective.

Analysts and Hedge Funds Opinions

William J Colombo (director) sold 52,156 shares at 60.11 per share price. On Nov 18, 2016, Lauren R Hobart (EVP & Chief Marketing Officer) sold 24,015 shares at 58.46 per share price. On Nov 18, 2016, Lee J Belitsky (EVP, Chief Financial Officer) sold 15,000 shares at 58.50 per share price.

Oppenheimer lowered its rating for Dick's Sporting Goods to perform from outperform, saying the company's earnings results will come in below expectations in the coming year.

"Recently, a large number of leading sporting goods manufacturers and retailers reported results well shy of expectations, all while certain industry-wide sales trackers also hinted at top-line disruptions for the sector," analyst Brian Nagel wrote in a note to clients Tuesday. "The breadth of this flood of seemingly soft data points renders us increasingly concerned that even the well-positioned DKS is unlikely to emerge unscathed."

Harvey’s Options Volatility Indicator


There is a storm blowing over the sporting goods industry. The recent closings of stores that are bankrupt or going bankrupt are probably going to provide discounts to the goods as these stores close up. These liquidations may impact Dick's near term results.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the DKS APRIL 21 2017 50.000 put at approximately $2.00. Place a pre-determined sell at $4.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.80.


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