Dick’s Sporting Goods (DKS) came out with first quarter earnings that were in line with analyst estimates. However, the forecast for the second quarter and the full year were well below what many had expected. Profit also slipped in the quarter due in part to higher material costs and slower sales than expected. Incidentally, Ockham Research downgraded Dick’s on Monday to Sell from Hold, and since the earnings announcement the company’s stock is down more than 20%.

Interestingly, Dick’s appeared to be resisting the slump in consumer spending as revenue was up about 11% over the first quarter 2007. However, a more reliable metric by which to judge the retail industry are same store sales. In stores that have been open at least a year; Dick’s struggled as sales were down 3.8%. The overall revenue number is incorporating sales from newly opened stores, which distorts the reality that consumers are less inclined to spend their shrinking pile of disposable income on sporting goods. The forecast for weak sales for the rest of the year reflect Dick’s management acknowledging this reality. The previous earnings estimate for the full fiscal year ending January 2009 called for $1.49-$1.54 per share. On Thursday, the company backed off of those estimates considerably, and now calls for earnings of $1.22-$1.36. For comparison sake, Dick’s earned $1.33 per share last year. This is certainly not the growth that they were hoping for.

While we do rate DKS a Sell, after today’s drop the stock is no longer overpriced by our model. The stock is selling in the low end of the range of what we consider normal price-to-sales and price-to-cash flow. Based on what the market has normally been willing to pay for given levels of sales and cash flow, we have a rationally expected price for Dick’s of $29. However, the weak forecast offered by the company today puts a damper on the moderate attractiveness of valuation. In addition, the services sector—which includes Dick’s—has triggered a downgrade based on our risk indexes. The combination of an overvalued sector rating as well as the forecasted rough retail environment gives us ample evidence to reaffirm Monday’s downgrade on Dick’s.