Dick's Sporting Goods needs good quarter from Galyan's

Chicago, January 19 - Shares of Dick's Sporting Goods Inc. have risen about 30 percent since mid-October, but the retailer needs a solid fourth quarter, particularly from its Galyan's acquisition, for the stock to climb higher.
     
Dick's announced in June 2004 that it was buying struggling Plainfield, Ind.-based Galyan's Trading Co., a smaller competitor with 47 stores, for more than $300 million. The deal put Dick's in markets where it hadn't been, including Atlanta and Chicago. Dick's said then it expected to earn $1.70 a share to $1.75 a share for the 2005 fiscal year that ends in a few weeks.
     
The Pittsburgh-based retailer completed the conversion of Galyan's stores to Dick's stores during the first three months of last year, and the company raised its earnings-per-share guidance for the current year to between $1.82 and $1.87 when it reported first-quarter results in May. The stock reached its 52-week high of $40.42 on July 12.
     
But Dick's lowered its per-share forecast to $1.70 to $1.75 in August - the outlook it gave in June 2004 - when it reported second-quarter results, saying sales at the former Galyan's stores were below expectations. The retailer had assumed that sales at the former Galyan's stores would outperform the sales at a new Dick's store in a new market, but sales turned out to be similar to that of a new Dick's store.
     
Sales were hurt because advertising dollars and frequency for the former Galyan's stores were less than that for typical Dick's stores, market watchers said. Also, Galyan's customers accustomed to finding casual apparel and more apparel-related products now found a more traditional mix of sporting goods products.
     
"It was the first time they lowered expectations since going public in 2002," William Blair analyst Bob Simonson said. "It created an uncertainty."
     
It didn't help that Wall Street, enamored by the lack of missteps by Dick's management, had given Dick's stock "somewhat of a premium," Caris & Co. analyst Claire Gallacher said.
     
Indeed, Dick's stock tumbled on the revised earnings news, losing about 25 percent of its value in mid-August. The shares reached a 52-week low of $26.95 on Oct. 14.
     
Shares of Dick's fell 70 cents, or 2 percent, to close at $34.59 Wednesday on the New York Stock Exchange.
     
"Up through the second quarter, we hadn't advertised as much in the Galyan's-specific markets as we had in the rest of the Dick's markets," said Jeffrey Hennion, senior vice president of marketing for Dick's. "As we came through the second quarter, we recalibrated the strategy, and the third-quarter results showed a significant increase in the performance of the former Galyan's stores."
     
Although the retailer doesn't separate sales from former Galyan's stores and sales from stores that have always carried the Dick's name, Chairman and Chief Executive Edward Stack said during a third-quarter conference call on Nov. 15 that performance at the Galyan's stores during the period was much better than in the first and second quarters. Market watchers also took it as a good sign that Dick's didn't change its full-year earnings view.
     
"If you get the improvements in Galyan's, the stock will rocket," Harris Nesbitt analyst Sean McGowan said.
     
Still, some investors want to know that the third-quarter performance at the former Galyan's stores wasn't a one-time deal.
     
"Whether Galyan's has been resolved remains to be seen," said Arun Daniel, an analyst with ING Investment Management Co., which owns shares of Dick's. "I think it will take some time, but I believe they'll get it right. The challenge is that when you have a big-box store like Galyan's, you can't just put a new flag on it."
     
Dick's Sporting Goods is the second-largest sporting goods retailer by sales, behind Sports Authority Inc. Dick's had 255 stores in 34 states as of Oct. 29.
     
Analysts surveyed by Thomson Financial expect, on average, for Dick's to earn 98 cents a share in the fourth quarter. Dick's earned 75 cents a share in the prior fourth quarter, or 81 cents a share excluding items. Analysts expect the company to earn $1.73 a share for the full year. In the previous year, it earned $1.26 a share, or about $1.42 a share, excluding items.
      
(Copyright 2006 by The Associated Press.  All Rights Reserved.)