Overheard On Wall Street: Skechers & Dick’s Sporting Goods

Skechers USA Inc.

This week, analysts have presented dueling outlooks on powerhouse casual-athletic brand Skechers.

Susquehanna Financial LLLP analyst Christopher downgraded the firm to neutral, from positive, on Friday — citing “optics, not the brand” in his reasoning.

“We still believe the Street is generally too high for Skechers to beat expectations in 4Q. At the same time, we would like to see management set a more conservative tone on 1Q16 versus trying to over-promise,” Svezia wrote. “On inventory levels, while clean, we just feel the optics around the likelihood of 40 percent-50 percent inventory growth may not translate well versus Street expectations of 1Q revenue growth of 17 percent.”

Svezia added that he continues to hear “very positive feedback and order activity” on the brand. However, he feels the current selling environment “may not generate a beat in sales and earnings, something investors need to see.”

A few hours after Svezia’s note, Sterne Agee CRT analyst Sam Poser appeared to fire off a rebuttal with a note headed “Optics Shmoptics — Skechers is Well-Positioned for 2016.”

“We recognize that inventory levels will be elevated at the end of 4Q, but that inventory is needed to support the backlog, which will likely be up over 30 percent,” Poser wrote. “Also, much of the optically excess inventory will be in transit, and will have shipped by the time 4Q15 results are posted, around Feb. 10.”

“We believe that smart investors will invest on facts, not nerves, despite the recent market volatility,” added Poser.

Dick’s Sports Goods

The latest financial woes of its competitor, Sports Authority, are expected to be a significant tailwind for Dick’s Sporting Goods, analysts say.

Dick’s, according to market watchers, will be the key beneficiary of the credit challenges and alleged store closures expected to impact Sport Authority in the coming weeks and months.

“Our checks indicate that Sports Authority is preparing to close up to 200 of its 450 stores in 2016,” Poser wrote. “23 percent of Dick’s stores are in the immediate area of a Sports Authority store, which should provide for rapid same-store-sales acceleration once the Sports Authority stores are closed. The potential closure of Sports Authority stores not near existing Dick’s stores will allow for uncontested entry into those locations, which are desirable.”

“Dick’s will fortify its No. 1 position in sporting goods with improved assortments and improved vendor terms,” Poser added.

Canaccord Genuity Inc. analyst Camilo Lyon also saw “positive sentiment building” for Dick’s. However, the analyst said the expected benefits could take time to be realized.

“The benefits would come over time, as closing stores can be a lengthy process (depending on lease expirations, creditor negotiations, etc.),” Lyon wrote. “… The bottom-line takeaway is that consolidation favors the leader (Dick’s) over the medium term. More importantly, it should help shift sentiment on the stock to positive now that there is an underlying potential for a positive shift in the competitive dynamic.”

Both Lyon and Poser give Dick’s a buy rating.

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