An Important Earnings Season Ahead for These Stocks

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The specialty hardline sector may not witness the same growth that it saw in 2012. Weakness in fundamentals might be one of the points, but the following note on three stocks tells us that there has been a considerable amount of uncertainty among the investor circles that has led to a weak outlook of this sector for 2013:

Dick’s Sporting Goods (NYSE: DKS)

Dick's Sporting Goods is a sporting goods retailer that operates stores primarily in the eastern and central United States.

Strong fourth quarter results from key vendors, including Under Armour and Nike, should bode well for DKS results. Concurrently, a number of discrete drivers, including the NFL jersey switch to Nike from Reebok, and a well-publicized spike in gun sales following the tragedy in Connecticut, should provide a boost to sales. Therefore, DKS is expected to report an SSS growth of +5.0%, ahead of the Street's estimate of +4.2%. The biggest concerns relate to a tough 1Q comparison as the firm cycles an unseasonably warm winter, fading trends in running shoes, and the launch of new bats a year ago. Finally, this season’s earnings call seems to be a good opportunity for the firm to clarify its capital allocation policies, which have been inconsistent based on recent moves (acquisitions/ buybacks/dividends).

Williams-Sonoma (NYSE: WSM)

Williams-Sonoma retails cooking and serving equipment, home furnishings, and home accessories through retail stores, mail order catalogs and e-commerce.

Analysis shows that the company will be able to beat the consensus estimates by 3 cents. Holiday sales results met expectations, and the firm reiterated 4Q guidance; However, gross margin trends look likely to have moderated after a long run of improvement. Goldman Sachs recently downgraded WSM to Neutral from Buy. GS believes that gross profit is cresting in 2H2012 as the firm cycles depressed year-ago margins. WSM is relatively mature based on space growth, and margins are at long run-peaks; as a result, modest multiple contractions are expected from here.


PetSmart is a specialty retailer of pet services and solutions.

Strong sales trends in the pet industry continued into 4Q12, according to Nielsen industry data. Growth accelerated on a sequential basis for all categories tracked - dog food, cat food, cat & dog treats, and cat/dog litter - suggesting PetSmart should report another quarter of solid revenue and SSS growth, aided in part by inflation in pet food inputs and the ongoing shift toward premium foods. The shift in mix is also driving strong gross margin expansion while persistent top line growth drives meaningful occupancy leverage.

All told, PetSmart is on track to post its best EBIT margin ever in 2012, and the Street looks for color on drivers from here. It is interesting to note that investors have recently shown some nervousness around online competition in the pet industry, which only now appears to be gaining momentum. The management is expected to comment on e-commerce trends of late. The company is expected to report in line with consensus estimates. The SSS growth is expected to be +5.6%. Beyond EPS, the Street will look for color on the role of new leadership (CEO/COO) as the management succession kicks in.

Foolish Bottom Line

As the note suggests, all three stocks have huge upside but are trading below their fair values due to the layer of uncertainty that has been prevailing in this industry. At this point, it will be valid to say that this earnings season conference call will be a golden opportunity for the companies to answer the general question that investors have. 

AnalystX has no position in any stocks mentioned. The Motley Fool recommends PetSmart and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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