Partially through inventory management, and partially through making sure they offer the right products at the right price, Dick’s can also improve its gross margin. In the last three months, the company’s gross margin was 30.87%. While Under Armour Inc (NYSE:UA) and NIKE, Inc. (NYSE:NKE) don’t have to stock retail stores like Dick’s does, these two companies carry gross margins of 45.93% and 44.22%. In a more direct comparison, Foot Locker, Inc. (NYSE:FL) reported a gross margin of 34.25%. Given that Dick’s has the lowest gross margin of the group, it seems reasonable that the company can improve in this area.
Go With the Flow
If Dick’s can improve its gross margin and inventory management, one natural result should be the company’s free cash flow would improve. Investors should certainly hope so, as Dick’s ranks second to last in its peer group.
The best way I’ve found to compare companies’ free cash flow generation is by looking at free cash flow generated per dollar of sales. By this measure, Dick’s generated about $.05 of free cash flow per dollar of sales over the last 3 months. By comparison, Foot Locker, Inc. (NYSE:FL) generated about $.07 of free cash flow per dollar of sales, and NIKE, Inc. (NYSE:NKE) led the way with about $.29 of free cash flow generated. The only company to perform worse than Dick’s was Under Armour Inc (NYSE:UA), which generated less than $.01 of free cash flow per dollar of sales. However, it should be noted that Under Armour spent heavily on marketing expenses in the current quarter.
If You Don’t Want to Wait
Buying Dick’s stock at the present time, means collecting a less than 1% yield and hoping that the company can fulfill analysts expectations of nearly 16% earnings growth. Given the company’s challenges, this earnings growth assumption is no sure bet, and investors may want to look elsewhere for better opportunities.
Foot Locker seems like a reasonable alternative, as the stock pays a yield of 2.3%, and though analysts expect earnings growth of just under 11%, the stock also trades for a cheaper multiple than Dick’s. While it’s difficult to recommend NIKE, Inc. (NYSE:NKE) at over 23 times projected earnings, with a just 11.8% expected growth rate, Under Armour Inc (NYSE:UA) is growing much faster at nearly 22%. While it’s true Under Armour is no great value at nearly 40 times projected earnings, at least the company’s earnings growth is intact, which is something that can’t exactly be said of Dick’s.
Investors in Dick’s may be waiting for the season to start, but if management doesn’t correct several problems soon, this game may be over before it begins.
Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Waiting for the Season to Start originally appeared on Fool.com is written by Chad Henage.
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