Stock Picks: DKS Up, SHLD Down

Investors latched onto a retail surprise Thursday, driving shares of Dick's Sporting Goods (DKS) up as much as 14% after the retailer beat earnings estimates. Dick's own previously issued conservative guidance likely played a role in a classic short squeeze for the Pittsburgh-headquartered sporting-goods chain.

Dick's second-quarter earnings declined on an annual basis but were above Street expectations, forcing short-sellers to bid up the stock as they unwound positions. Earnings fell to 33 cents a share from 34 cents a year ago, but beat analysts' average estimate by two cents, according to Thomson Reuters.

Revenue rose about 4% to $1.13 billion, slightly ahead of analysts' forecast of $1.12 billion. Same-store sales dropped 4.1% from a year ago, but also topped Street estimates, which forecast declines as severe as 7.8%.

On a conference call, management said it expects earnings of four cents to seven cents a share for the third quarter, better than the current Street forecast of four cents a share. For the full year, Dick's now forecasts earnings of $1.02 to $1.07 a share, up from its prior view of 88 cents to $1. Analysts, on average, forecast full-year earnings at 99 cents a share.

"Looking to the rest of 2009 we're increasing the expected number of new stores as well as raising our earnings guidance and expected same-store sales," Chief Executive Ed Stack said on a Thursday conference call. "Many of you have heard us say that the difficulties of the current challenging economic environment can also bring opportunities."

The company now plans to open 24 stores in fiscal 2009, up from 20, and expects third quarter same-store sales to decline 4% to 5%, narrower than earlier guidance of a 6% to 9% drop.

Thomas Weisel Partners analyst Jim Duffy said better-than-expected results from the company's Golf Galaxy chain helped earnings, but he remains cool to management's upbeat projections.

"Though we had expected Dick’s to deliver [earnings] upside in [the second quarter], we are impressed by the strong comps in the quarter," Duffy wrote Thursday. "Based on a pre-market price of $22.50, the stock is trading with a growth multiple, and we would not be inclined to buy at these levels until the company can prove it can continue to grow square footage despite a shortage of new retail developments."

The optimistic outlook, better-than-expected sales and earnings beat were a potent combination for investors who expected worse results. As of Aug. 10, about 12.3% of Dick's shares were held short, a high proportion of a company's public float. That forced early buying and a price spike that likely won't be sustainable.

Bottom Line: Sell
This could be a good time to take profits. Like every retailer, Dick's needs to see sustainable sales increases before investors can count on growth.

Shares of retailer Sears Holdings (SHLD), parent of its namesake store chain and Kmart, dropped sharply in midmorning trading after swinging to a surprise quarterly loss.

The Hoffman Estates, Ill., company reported a loss of 79 cents a share for its second quarter vs. a profit of 50 cents a share in the year-ago period. The loss came largely from restructuring charges, though revenue dropped to $10.5 billion from $11.7 billion a year ago.

Excluding charges and other items, Sears would have posted a narrower loss of 17 cents a share, but analysts, on average, forecast a profit of 35 cents.

"While the overall retail market remains difficult and its impact is reflected in our results, we continue to take actions to increase the efficiency of our operations," interim CEO W. Bruce Johnson said in a statement. "We have reduced our selling and administrative expenses by approximately $1 billion over the past four quarters, including a reduction of $212 million this quarter."

The company did not host a conference call for investors and analysts.

Same-store sales slipped 8.6% for the entire company. Sears-branded stores posted a 12.5% drop in same-store sales, while Kmart stores fell 3.9%. General merchandise department stores such as Sears face intense competition in the best of times, but cutbacks in household spending in the severe recession amplified Sears' woes.

Discount retailers such as Wal-Mart (WMT) have grabbed market share with lower prices, while peers such as J.C. Penney (JCP) have gained an edge in clothing sales, says Morningstar analyst Kim Picciola. Sears also must fend off home improvement store chains Home Depot (HD) and Lowe's (LOW), which compete for appliance and tool sales.

"I like that they're experimenting with different initiatives, getting better merchandise to their stores and service to their customers," Picciola says. "They certainly have a lot to do relative to their peers."

Sears has been a puzzle for Wall Street since 2004, when Kmart, then controlled by hedge fund manager Edward Lampert, bought the Sears chain and merged the companies. At the time, many investors thought Lampert was setting up a commercial real estate play, but the company's subsequent retail restructurings – and its reluctance to provide guidance and stage conference calls – have left investors and analysts unsure of its broader strategy.

The previous CEO Aylwin Lewis left the company in 2007. Johnson has been in place for a year, but retains the interim CEO designation.

"There's still a lot of questions surrounding the story and what the long-term strategy is," Picciola says. "Right now they're trying to muddle along. They're trying to do what they can and control the parts of the business they can, and control the loss of market share."

Bottom Line: Hold
There's some overselling here, but it's hard to see Sears as a stock that trades on fundamentals -- and other retailers may be better long-term bets.