A company that knows its business
Big 5 Sporting Goods Corporation (NASDAQ:BGFV) operates a profitable business in the western part of the U.S. Selling a wide array of sporting and outdoors equipment, it offers both established brands and products manufactured especially for its stores. Its unique business model and merchandising strategy allows it to sell quality products at discount prices, providing value to clients while resulting in a wide gross margin. Actually, gross margin has been over 32% for more than 10 consecutive years. Going forward, these surpluses should be one of the main growth drivers.
Trading at under one-third of the industry’s average valuation, at 20 times P/E, while offering strong financials and compelling growth opportunities expected to deliver a mean annual rate of almost 16% over the next five years, I’d recommend buying this stock.
This position is based not only on its consensus beating quarterly results — earnings surpassed consensus estimates by 61.90% last reported quarter, reaching $0.34 per share on the back of a 10% increase in comparable store sales — but also on its expansion and cost reduction plans.
For fiscal 2013, the company targets to open about 15 to 20 new outlets, introduce technological advances in its stores to ameliorate customer service, and reduce its transportation expenses by $800,000 or more on the back of efficiency improvements and a new distribution center in Oregon. If earnings and margins (especially operating and net margins) continue to improve, its valuation should become even more attractive. Relative to the consensus EPS estimate, the firm exchanges at 16 times its projected earnings, a discount of over 30% if compared to the industry mean.
An interesting opportunity to invest in
Dicks Sporting Goods Inc (NYSE:DKS) offers higher margins and return on equity than Big 5 Sporting Goods Corporation (NASDAQ:BGFV), but trades at a higher valuation in relation to its earnings and sales. However, beating the industry averages by a comfortable difference, I would recommend taking a look at this firm.
Its product assortment is very similar to Big 5 Sporting Goods Corporation (NASDAQ:BGFV), although Dicks Sporting Goods Inc (NYSE:DKS) also owns a successful e-commerce segment and a segment leading golf specialty retailer, Golf Galaxy. By leveraging its strong vendor relationships, it can “source overstock and closeout merchandise at substantial discounts, in order to achieve dual objectives of boosting gross margin while offering compelling value to customers.” (Zacks Equity Research)
Already best-in-class, room for improvement is still present as it holds under 10% of the total U.S. market share. Its strong focus on shopping and customer experience makes its model very hard to replicate, and helps it differentiate and keep its competitors behind. In consequence, national expansion plans look promising; planned store openings for 2013 are expected at 40 new locations and long-term targets are even more ambitious — the company expects to at least double its store base in the years to come. Acquisitions have and will continue to play a relevant role as well, as evidenced by the Chick’s Sporting Goods purchase in 2007.
Expecting an average annual growth rate of about 16% (Zacks, Yahoo! Finance) for the next five years, while still trading at 22.4 times its earnings, a 70% discount to the industry mean, and offering compelling margins and returns, I would strongly recommend buying Dicks Sporting Goods Inc (NYSE:DKS) shares.
A company with strong presence in outdoors
Cabelas Inc (NYSE:CAB) leads in the hunting, fishing, camping, and related outdoor merchandise retail and direct marketing segment. Although it offers the highest expected average annual growth rate among the three firms at 17%, it also trades at the highest valuation, at 25.1 times its earnings and 1.5 times its sales. Nevertheless, I believe that Cabelas Inc (NYSE:CAB) is still a buy case due to its long-term growth prospects provided by its multi-channel approach to sales, its diversified business model, and its revamping initiatives for the years to come alongside.
Despite owning under 40 stores in North America, each of them is unique and attractive, offering a complete experience not only in the hunting and camping equipment, but also in the dining segment. Its strong presence in the online arena has driven hundreds of customers to these authentic stores and will most likely continue doing so. Its next generation stores are even more productive and require less capital investments; the company targets to open 15 new stores of this kind in both the U.S. and Canada before the end of 2014.
Last quarter’s results portray an encouraging outlook. Same store sales grew in almost every segment, from guns to optics. Earnings also rose considerably, to $0.70 per diluted share, up 75% year over year. As stated above, its multi-channel retail strategy helps it derive revenue from various sources and attract customers from diverse locations.
Alongside attractive store retail revenue, direct revenue (derived mainly from its website sales) rose 18.4%, year over year, last quarter. Operating, net, and gross margins also rose, reaching industry leading values of 9.4%, 5.9%, and 35.6% respectively.
Bottom line
As stated in the introduction, these three companies trade well below industry average valuations while offering above average expected annual growth rates. Poised to outperform the market, I’d recommend adding these three stocks to your portfolio.
The article Are These 3 Sports & Outdoors Retailers Good Investment? originally appeared on Fool.com and is written by Damian Illia.
Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Damian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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