Dick's Sporting Goods Is Downgraded By Citigroup Due To Concerns About Slowing Demand And Lingering Margin Pressures

Citigroup has warned that Dick's Sporting Goods shares could suffer in the near future as a result of a tough outlook for 2023.

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Paul Lejuez of Lejuez & Co., Inc. downgraded the sports retailer's stock to neutral from buy, citing concerns over near-term gross margin pressures due to the lingering excess inventory as well as potential slowdowns in demand in the short term.

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“Given the difficulties that DKS will face in comparison to its multi-year performance in 2023 (especially in the first half), it is hard to see how it can sustainably grow its sales and earnings per share, especially if the apparel and footwear categories slow in the near term (55% of sales),” he wrote in a note to clients on Tuesday.

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There has been no better performer in our universe over the past 12 months than this stock... It is also crowded at the moment, making the risk/reward at current levels more balanced at this time," Lejuez added about the stock.

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The shares of Dick's Sporting Goods fell by 2% before the bell on the news of the downgrade. Shares of the company have gained nearly 8% so far this year.

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In spite of the company's continued sales growth of $3.5 billion since 2019, Lejuez sees limited opportunities for further expansion given the slowing environment for apparel and footwear in the near future.

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“We expect EPS to beat consensus in Q2 ($2.98 versus $2.90 consensus) driven by stronger sales, but we anticipate weaker gross margins in Q2 as compared to consensus, he wrote, adding that 2023 guidance should show “another increase in sales/margins give back.”

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The bank's price target has also been lowered from $143 a share to $140, which represents an 8% gain over Monday's close of $143 a share.

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“While we do not believe the stock is expensive on the surface as it trades at a P/E of 11.5x, and an EV/EBITDA ratio of 6x, we believe that below consensus guidance will likely drive a negative reaction in the stock price, especially in light of how difficult the sales comparisons will be in 2H23”.

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