A better superstore investment
Dick’s Sporting Goods was founded by Dick Stack in 1948 with $300 he received from his grandmother that was stashed away in her cookie jar. Just as with Cabelas Inc (NYSE:CAB), Dicks Sporting Goods Inc (NYSE:DKS) was started in a family kitchen; it’s just that this one was a grandmother’s.
Maybe it is because of that $300 head start over Cabela’s, maybe not, but today Dicks Sporting Goods Inc (NYSE:DKS) sports a market capitalization of $5.86 billion. Over the last five years, they have increased earnings by an average of 14.06% per year and sales by an average of 8.46%. The business is valued at 16.7 times 2013’s projected earnings and has a 5-year projected earnings growth rate of 16.6% per year, making it very fairly valued.
However, unlike Cabelas Inc (NYSE:CAB), Dicks Sporting Goods Inc (NYSE:DKS) has produced 5-year average returns on equity, assets and capital of 13.4%, 6.8% and 10.2% respectively, which are numbers far superior to those produced by Cabela’s. Furthermore, while Cabela’s is mainly focused on hunting, fishing and camping related items, Dicks Sporting Goods Inc (NYSE:DKS) offers a wide selection of items related to a much broader range of sports and activities.
The remora of sporting goods
A remora is a fish that attaches itself to larger fish and lives off the scraps created when the larger fish feeds. It appears that Hibbett Sports, Inc. (NASDAQ:HIBB) may well be the remora of sports retail as they tend to be found in strip malls adjacent to a Wal-Mart. As an avid outdoorsman and sport enthusiast, I know that Wal-Mart Stores, Inc. (NYSE:WMT) is not the name that leaps to mind when I am seeking to acquire new equipment; they simply don’t have the overall quality and selection I require. Hibbett Sports, Inc. (NASDAQ:HIBB) targets those shoppers who simply can’t satisfy their sporting needs with a Wal-Mart selection; so much for those who believe Wal-Mart is the death of all other retail.
Hibbett Sports, Inc. (NASDAQ:HIBB) takes another bit of experience from Wal-Mart Stores, Inc. (NYSE:WMT) in that it locates its 5,000 sq. ft. stores in small- to mid-sized communities and uses Wal-Mart to concentrate its customers. The results have been superb. Profits have improved at an annual average rate of 19.07% for the last five years and net margins have averaged 7.1% during that time; sales have grown at 9.47% a year as well. The 5-year annualized returns on equity, assets and capital of 26.8%, 16.7% and 24.2% are simply stunning, and the 2013 P/E of 17.8 is only slightly above the projected 5-year growth of 15.62%.
Final Foolish thoughts
While there is nothing in the Cabelas Inc (NYSE:CAB) numbers that would cause me to consider it a bad investment, the negative aspects of the capital efficiency prevent me from considering it a compelling opportunity.
Dicks Sporting Goods Inc (NYSE:DKS) offers a well-diversified product mix and has a solid record of producing good results from operations. Its current valuation warrants serious consideration from investors seeking long-term capital gains between 10% and 13% per year.
Hibbett Sports, while offering a more limited selection than the other two options selected does offer a more risk adverse profile due to the smaller size of each individual store. They have also positioned themselves very intelligently by allowing Wal-Mart to concentrate their customers for them. This business is a strong buy and should produce annual returns of 15% or more.
The article A Sporting Way to Make a Winning Investment originally appeared on Fool.com is written by Ken McGaha.
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