Deutsche Bank analyst Mike Baker upgraded Dicks Sporting Goods from Hold to Buy and raised the price target from $33 to $39.
“After several quarters of weakness, in part caused by fashion changes which saw a focus away from core athletic footwear products — where DKS is stronger compared to the lifestyle trends that came into vogue — we believe industry trends have stabilized,” Baker said in a Friday note. (See the analyst’s track record here.)
Deutsche Bank upgraded the retailer for three reasons, Baker said:
Industry trends are bottoming.
Inventory levels are coming back into balance with demand, lessening the impact on gross margins. The risk to margin forecasts is reduced, as models already reflect increased investment spending.
Several indicators, both industry-related and from competitors and suppliers, support a more positive view of Dicks Sporting Goods, as retail sales are tracking up in the fourth quarter for the first time in six quarters, Baker said. Even more importantly, retailers with significant footwear exposure are seeing a 600-basis-point improvement in comps, he said.
“We believe much of the industry weakness over the past several quarters was driven by a glut of inventory that led to a supply and demand imbalance and thus lower margins,” Baker said. “But, we believe that supply and demand are starting to move back in line.”