But is it a good investment?
Strategy snapshot
A central part of their strategy is having “brand shops” in their stores, dedicated areas in the store with a large selection of a brand’s products. For example the company had Nike shops in 171 of their stores at the end of 2012, up from 105 the previous year. They are also introducing new brand concepts, such as the Field & Stream store they will open in mid-August. This outdoor products concept allows the company to gain deeper insight into what outdoor enthusiasts, including hunters and fisherman, want — lessons the company can apply to stores throughout their chain. Dicks Sporting Goods Inc (NYSE:DKS) also offers private brands the customers can’t find in other stores, including Adidas baseball and Top-Flite golf. This exclusivity insulates the company from price competition with other retailers.
Latest financial results
For the first quarter ended May 4, Dick’s reported a 4.1% increase in sales to $1.3 billion compared to the first quarter of 2012. Earnings per share rose slightly from $.45 in 2012 to $.48 in 2013. However, consolidated same store sales decreased 3.8%, a larger drop than the company had forecast. For the full year, management believes same store sales will grow 2-3%. The company is definitely in expansion mode, intending to open 40 new stores this year. They also will complete partial remodels of 75 existing stores.
Same store sales declining with the economy on the upswing might be a troubling sign. For perspective let’s take a look at one of Dicks Sporting Goods Inc (NYSE:DKS) competitors, Cabelas Inc (NYSE:CAB), which is a specialty retailer and direct marketer that focuses on the outdoor market, including camping, hunting and fishing.
For their second fiscal quarter of 2013, they reported a strong 10.5% increase in comparable store sales, which have now increased 7 quarters in a row. Earnings per share were $.62, a nearly 32% increase. The company offers its own credit card through a company-owned bank that customers use for 30% of total purchases at the stores. This gives Cabelas Inc (NYSE:CAB)’s a “stickier customer base,” a Credit Suisse report says. As of April 25, 2013, Cabelas Inc (NYSE:CAB) operated 44 stores.
Company management was thrilled with the performance of their next-generation stores that yielded an astonishing 40% higher sales per square foot than what they term their legacy stores achieved.
Risk factor#1
In Dick’s Sporting Goods’ 10-K, management cites one major risk factor as:
“Our ability to predict or effectively react to changes in consumer demand or shopping patterns”
When you go into a store that is familiar to you, you may not even notice the changes in merchandise and prices that are the result of decisions made throughout the organization. The consumer doesn’t remain static, and neither can a retailer’s merchandising strategy.
This risk affects the choices of product selection a retailer like Dicks Sporting Goods Inc (NYSE:DKS) makes. The company must guess, months in advance, whether their customer base will for example open their wallets more or seek discount merchandise.
So many retail chains carry sporting goods
From the 10-K: “Intense competition in the sporting goods industry”
True, the company does have to compete with an array of other retailers, some much larger and with a greater market presences than theirs. Their business model of grouping a number of specialty stores under one roof allows them to compete by offering a broader product selection than specialty sports stores and offer pricing that allows them to compete with mass merchandisers. Additionally, they capture customers in the “beginner, intermediate and enthusiast” categories by offering each group a large product selection and various price points to fit every budget.
Their expansion strategy — the company had 355 stores at the end of 2007 compared with 520 at the end of the first quarter — addresses the competitive issue as well. Consumers have more opportunities to buy from Dicks Sporting Goods Inc (NYSE:DKS) in more areas of the country, and the brand name becomes more well known.
Where to go next
From the 10-K: “Lack of available retail store sites on terms acceptable to us, rising real estate prices or other costs and risks relating to our stores, or our ability to open new stores”
They are addressing this risk by turning their attention to smaller markets than they have in the past. This factor should not be a problem, unless interest rates go up significantly, making the cost of financing expansion much higher. The company has stated a long-range goal of doubling its number of stores.
How’s this for a standout statistic on the company’s balance sheet at quarter’s end: outstanding borrowings under their credit facility totaled ZERO. This not only protects the company from interest rate increases but gives it access to capital to move quickly on expansion opportunities that arise.
Disillusioned sports fans (or consumers)
From the 10-K: “Performance of professional sports teams, professional team lockouts or strikes, or retirement or scandal involving sports superstars”
This risk might seem of minimal potential negative impact, but consider that annual sales of NFL licensed merchandise alone are more than $3 billion. Although there are some teams like the Green Bay Packers with a national fan base, team merchandise sales in any given area tend to be focused on the teams in that city or region. If the team has several down years in row, merchandise sales can be affected. The never-ending parade of scandals in sports also dampens fan loyalty. If fans feel betrayed by a team or individual player, why would they pay $100+ for a jersey?
For Dicks Sporting Goods Inc (NYSE:DKS), this isn’t a significant risk because it offers so many different products across so many sports — and apparel in total accounts for less than 30% of revenues. Like all retailers, though, Dick’s faces the risk of consumers in general becoming disillusioned about the economy and deciding to postpone purchases of non-essential goods (like a new set of golf clubs). If you are pessimistic about the sustainability of the recovery, this risk should be of concern to you as you evaluate Dick’s as an investment.
What we learned
Dick’s Sporting Goods should continue to grow its base of stores at a brisk pace. The downturn in the recent quarter’s same store sales should not discourage investors. Remember, for the full year 2012, same store sales were up 4.3% and net sales rose a very healthy 12%. Cabela’s numbers were outstanding but keep in mind they have a store count of just 44 compared to more than 500 for Dick’s. It’s easier to grow rapidly from a smaller base. Cabela’s gives investors an opportunity to take advantage of the growth of the outdoor adventure sports market. Dick’s participates in the growth of sporting goods market as a whole.
Dicks Sporting Goods Inc (NYSE:DKS) is a creative company that develops innovative new store brand concepts and continually upgrades the shopping experience in its existing stores. The company is also very well managed from a financial standpoint. Dick’s Sporting Goods certainly deserves consideration as a retail company to add to your portfolio.
The article What Risks Could Spoil the Fun for This Sporting Goods Retailer? originally appeared on Fool.com and is written by Brian Hill.
Brian Hill has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Brian 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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