Dick’s Sporting Goods Inc. Forecasting
Small and large corporations forecast every single day. Forecasting is a necessity for operation managers to properly supervise and run a company’s supply chain inventory on a daily basis. This is not an easy job; it requires a lot of work in order to gain and hold the confidence and support of the customer base.
Forecasting, however, relates to more than just supply chain inventory. For example, forecasting also connects to budgeting, capacity, regulations, weather, stock market, and sales (demand). There are a number of different methods to forecasting depending on what the focus is, but the basics of forecasting remain constant: decide what to forecast, evaluate and analyze appropriate data, and then select and test the forecasting model.
When focusing on a public company’s stock value, research analysts working in the financial industry are constantly forecasting and analyzing estimates in order to help investors make the proper, most measurable decisions. In many cases, these investments are made in large sums of money, so it is critical that analysts find and use accurate forecasting measures.
Constantly, throughout the market day, information sources release and report analyst’s forecasting reports and predictions for publicly traded stocks. CNN Money, for instance, will report a firm’s stock price forecast, earning and sales forecast, and analyst recommendations. Within the stock price forecast, a collection of selected specialist analyst provide the range and median price of the stock for the next twelve months. In regards to the earning and sales forecasts, CNN provides previously reported earnings and sales. Next to that data, they then include what analysts forecast those measures to look like in the future. Using this data and information, analysts then decide whether to buys, hold, or sell a particular stock. These recommendations are illustrated in the Analyst Recommendations sections of CNN’s stock report. Here is a link to the CNN report for Dick’s Sporting Goods Inc: http://money.cnn.com/quote/forecast/forecast.html?symb=dks
According to the report, twenty-five analysts forecast a median price of $34 per share for DKS in the future twelve month, with a high estimate of $43 and a low estimate of $20. Quarterly, analysts are forecasting that Dick’s earnings and sales will decline. Annually, they predict that Dick’s will see a decline in earnings, but a growth in sales. Among thirty-two investment analysts polled, twenty-one suggest holding, nine say buy, and the remaining two recommend selling the stock. These suggestions are primarily based on the forecast measures (*Note: the data on the report can change constantly).
This article proves and highlights that fact that forecasting relates to much more than just supply chain inventory; it plays a significant role in the stock market and investing. Therefore, forecasting is that much more important for operation managers, since they are concerned with the company’s stock price, shareholders, and customers.
Question to think about:
- A new Dick’s Sporting Goods store is currently being built in the Willow Lawn shopping center in Richmond. Before this project was approved and started, did operations managers forecast future sales of this new location?
It is interesting to see forecasts that happen in all fields of study. We have been focusing mainly on supply chain forecasting, however this also leads to sales forecasting which can help lead to forecasting the value of a firm. As Teddy alludes to, forecasting the value of a firm can lead to analysts predicting stock prices (since stock prices are directly related to the value of a firm). Throughout my finance classes here, we have looked at how the changes in sales can change the value of the firm and the stock price as well. Since analysts are constantly doing this, it is interesting to see if this has an actual impact on the price of a company’s stock. In this article (https://www.cnbc.com/2018/03/13/ge-shares-are-tanking-after-jpmorgan-says-its-dividend-is-still-high-risk.html), CNBC talks about how GE’s stock price plummets after a JPMorgan analyst forecasts a lower stock price for the GE stock. The analyst thinks that the stock price is overvalued. This shows that in finance, along with in supply chain management, a forecast can have a drastic impact on a company and the economy as a whole.
As you said, Forecasting is instrumental within all businesses because it covers so many areas of interest. You touched on stock market and sales but what I was thinking, when considering your question, was management’s forecasting of external factors such as location, and weather/seasons for the construction and opening of the new site. After doing some research I found that the new store is set to open this summer. Clearly this was a strategized decision because management knows the type of inventory being sold and recognizes when demand for this inventory is at its peak. Dick’s sells athletic clothing/goods which are used most frequently in the summer time. They forecasted the optimal season of highest demand and planned their opening around it therefore ensuring greater sales. Opening during the winter season would be a mistake for Dick’s because of the lack of demand for their products during that season. They also considered location in reference to Stony Point and Short Pump (where the other 2 Dicks are located) and saw Willow Lawn as the optimal location to bring in customers.
http://www.richmond.com/business/local/dick-s-sporting-goods-new-restaurant-coming-to-willow-lawn/article_3b00dc10-d1c1-5186-84d7-6d10ffac79b5.html
I agree, forecasting helps operations managers beyond just with supply chain management. To answer the question proposed, operations managers at Dick’s Sporting Goods must forecast future sales of a new location before deciding if the expansion is worth the costs. I decided to do further research into how operations managers use forecasting for expansion decisions in particular. Because these expansion projects are so costly, operations managers must be confident of all of the risks with their decision to expand. In the article, “The Forecasting Model Approach to Company Expansion”, it states that “the key to figure out if any expansion is worthwhile is to use a forecasting model to predict the extra revenue and expenses that will result from the expansion”. Forecasting an opening of a new location is difficult and poses major challenges. This is especially true when the locations are relatively close to one another. With the case of Dicks Sporting Goods, there are five locations in the Richmond area that come up when one does a google search. The opening at Willow Lawn “will likely draw some customers or sales away from the original location”, complicating the forecasting of Dick’s Sporting Goods sales. Another factor in forecasting sales is the importance of the time before and after the expansion takes place. A business expansion can take some time before managers experience the growth they planned to see in their forecasts. The forecasting of revenue “should be modeled as a ramp up to expectations, at least for a minimum of one year”. Operations managers must determine how their business will operate following an expansion in order to develop a forecasting model that is accurate for the expansion itself. Forecasting is a vital component in an operations manager’s decision to expand.
https://yourbusiness.azcentral.com/forecasting-model-approach-company-expansion-29469.html
I agree with how forecasting can help make expansion decisions a lot easier. However, one thing that should be kept in mind while forecasting is that it only tells us what “might” happen in the future and does not guarantee a successful expansion. In most of my finance courses, the professors have always emphasized that a good forecast does not automatically mean a successful project or expansion. I also believe that sometimes we assign too much value to forecasting when in reality things can go a lot differently than the forecast. Sometimes, it might be more valuable to use human judgment of an experienced manager than a forecast based on a model.
This post initiates quite a fascinating conversation that brings up forecasting in a new light. I find forecasting stocks or other asset prices very interesting. When anticipating future growth changes, it is imperative to truly understand a company and its processes. As mentioned in the post, stock analysts consistently adapt and edit their recommendations based on a company’s performance. Additionally, their research will include subjectivity derived from opinions on how companies have forecast their own future and inventory. Dick’s Sporting Goods for example is a brick and mortar store with some electronic distribution methods. As brick and mortar is on the decline as a result of the Amazon effect, firms like Dick’s are placed under more stress to efficiently forecast their inventories due to volatile demand. If the company incorrectly allocated inventory during one quarter, net income will be reported lower and the company’s stock price could be severely affected. This consequence of course places even more importance on proper inventory forecasting. No company wants their stock price to dwindle, so correct analytical practices are necessary.
I feel like Dick’s Sporting Goods must perform very specific internally forecasting. They sell many different products, but I believe those sales are very volatile depending on the season, weather and location of the store. In order to properly manage their supply chain inventory, they must have a very good idea about what products are most popular and when. The most obvious examples are in their clothing and team sports products. Dick’s will have far less football products available in the spring than they will in the fall and winter. In different areas of the country where different sports are more popular the proportion of team sports products will change accordingly. Additionally, I have family members who live in the pacific northwest, when visiting them I tried to buy something from a local Dick’s Sporting Goods but I could not find it because there was very little selection. The majority of the inventory consisted of outdoors and camping gear. Another example of this are stores in the deep south. In my experience with this, I have found that some of those stores look more like a Bass Pro Shop or Cabela’s with all of the hunting and fishing gear. Companies like Dick’s need detailed forecasting and analysis in order to plan their supply chain so that they can have the right amount of inventory, in the right places, at the right time.
I searched the Richmond area for Dick’s Sporting Goods locations and found that there are three locations surrounding Willow Lawn, about 14-17 minutes away from each current location. From this I can assume that Dick’s is forecasting an increase in sales or has noticed an increase in demand, because there are already locations in the relative area and a 15-minute drive is not very far. Willow Lane’s website says the new location will open in the summer of 2018. From the yearly earnings, you can see a spike in sales from April to August, and then a decline into September. I would assume that Dick’s looked at its forecast for 2018 and can predict the same kind of spike in sales over the summer. Therefore, the opening of a new location in a very popular area of Richmond makes the most sense.
https://www.marketwatch.com/investing/stock/dks/charts
I searched the Richmond area for Dick’s Sporting Goods locations and found that there are three locations surrounding Willow Lawn, about 14-17 minutes away from each current location. From this I can assume that Dick’s is forecasting an increase in sales or has noticed an increase in demand, because there are already locations in the relative area and a 15-minute drive is not very far. Willow Lane’s website says the new location will open in the summer of 2018. From the yearly earnings, you can see a spike in sales from April to August, and then a decline into September. I would assume that Dick’s looked at its forecast for 2018 and can predict the same kind of spike in sales over the summer. Therefore, the opening of a new location in a very popular area of Richmond makes the most sense.
https://www.marketwatch.com/investing/stock/dks/charts
I was surprised when I initially saw that another Dick’s was opening in this area in general. Between the 4 stores that already exist in the area, the triangle that the 3 closest to Willow Lawn form guarantee that you wouldn’t have to travel even 20 minutes to reach one. As a result, one must conclude that the demand exists and that the forecasting projects decent to good sales at this new found location (most likely without cannibalization), or otherwise it would be pointless for the company to invest in building, stocking, and setting up an entire new store in an area that is basically already covered.
If analysts are predicting a growth in sales, but a decrease in earnings, it begs to ask what is changing? Are the earnings decreasing as a result of expansions (particularly ones that could be internally funded), that will initially cover the costs? Are prices/margins being cut?
Regardless of what the answer to these are, with how the forecasting is predicted the future for Dick’s sporting goods, it is interesting that they would choose to open another store.
Forecasting sales is crucial in properly managing inventory which can lead to more costs than anticipated if inventory stock is left sitting on the shelf or if supply does not meet demand. Managers are more worried about keeping their job than the returns the shareholders see, so they will make very conservative forecasts regarding demand and inventory upkeep. However, the CEO acts as the intermediary between the managers and the shareholders, and so he will ultimately decide the direction a company takes based on the forecasts given to him by his management team. Teddy looked more at what external analysts will do with the information they extract during industry research and firm specific due diligence. If demand is lower for Dick’s than in previous quarters than it will sell less product and see less earnings, hence less profit to investors. If the forecasts are heading in a downward trend for the long-run then the growth prospects will also be low and the stock price will fall further.
I agree we can use forecasting in a lot of different business aspects. I think your point on the stock market specifically is very useful. Generally, forecasting is used to predict the future. Companies want to know how much inventory customers will demand next month, how many employers they need next season, or how the price of a stock is expected to change in the next year. Granted, we can make accurate predictions just utilizing past data, I think it is also important to remember that there are also shocks that occur in the market that cannot be forecasted. Dick’s is a good company to analyze, especially the fact that you mentioned that their earning and sales are expected to decline. I’m wondering if this forecast can change and what types of factors may cause it. For example, Dick’s may start a new marketing strategy that actually greatly increases its sales. Is that forecasted in CNN’s analysis? What I am getting at is that business makes hundreds of decisions over the year, both good and bad, so I think long-term forecasts can be very misleading, especially when it deals directly with where people put their money. Retail especially can be a tricky industry because so much of their success is related to the forecasting of new products. North Americans retailers care more about forecasting than global retailers. If products do not start flying off the shelves as soon as they are launched, North American retailers start to worry. With that being said, it is important that analysts, investors, and retails managers understand the numbers that actually go into forecasting and the effects that might change them.
Article Link- https://www.retailtouchpoints.com/topics/inventory-merchandising-supply-chain/73-of-north-american-retailers-worry-about-new-product-forecasts-accuracy
I think Dick’s is honestly the perfect case study for the forecasting of seasonal demand. It is very clear what Dick’s needs to focus on selling during certain months of the year because certain sports are only played in one or two seasons of the year. I know it feels like every time I walk into the Dick’s near my home it feels like the store has a completely different layout. In the Spring they have increased the size of the lacrosse and baseball sections while decreasing the size of their basketball and hockey sections. The size of each section is based on their forecasted data. Every sport often has its own section year round but the section may be only a quarter of the size in the off season. With a company like Dick’s seasonal demand plays a huge role and accurate forecasting is necessary. I can’t imagine the new Dick’s location that is coming to Richmond hasn’t been collecting as much data as possible from the other sporting goods stores in the area to determine just how much of each type of inventory to have on the shelves when the store first opens. It’s always difficult to predict and forecast needs without historical data which means this new store will have to rely on their studies of similar stores to accurately predict demand.
Forecasting sales demand for a company like Dick’s Sporting Goods entering an area like Willow Lawn in Richmond is far more three dimensional than weighted moving averages and exponential smoothing (although I imagine much of that is included). Since they have not entered the Willow Lawn mall before, they must use another company in the area or another Dick’s Sporting Goods nearby to forecast sales demand. Location, seasonality, sports trends, and so forth are all very important factors to Dick’s Sporting Goods when deciding where to operate. If for some reason these factors do not provide the adequate projected returns they are hoping for, then Dick’s Sporting Goods will choose to go elsewhere. The huge size and scale of a brick and mortar building for Dick’s Sporting Goods costs quite a lot of money, so I imagine the choice to move into Willow Lawn was well researched and well forecasted.