When your whole life has been guided through sports, then there is no doubt that having a reliable and diverse sports store near you is a life saver. Dicks Sporting Goods Inc (NYSE:DKS), a full line omnichannel sporting goods retailers, offering a broad assortment of sports equipment, apparel, footwear and accessories, seeks to be every person’s life saver with more than 850 stores in 47 states in the United States. However, even if it is everybody’s life saver, does DKS makes a good investment?
What Are The Growth Drivers For Dicks Sporting Goods?
To define the long-term potential of Dicks Sporting Goods, here are two reason why, I believe, DKS is a good investment for your stock portfolio: First, strong omni-channel presence to capitalize on online trends. Dick’s opened two national ecommerce distribution centers in Q3 of 2019 – negative impact to margins in Q1 2020 but has enabled company to respond strongly in the COVID period and will drive their long-term growth. Additionally, DKS Curbside Contactless Pickup and Buy-Online, Pickup-in-Store (BOPIS) initiatives have driven significant sales in 2020 and based on several surveys, people are loving BOPIS during this pandemic.
Second, shift toward accessible health & fitness lifestyles: COVID-19 has drastically accelerated existing trends toward decentralized, accessible fitness regimen options. High-tech home gyms and fitness apps, such as Peloton, Tonal, and TrueCoach have experienced revenue growth of more than double when compared YoY. Given the previous, the Total Addressable Market will most certainly expand as a new class of customers outside of traditional structured athleticism demographics join the fitness/sports world, increasing DKS’ demand for sporting goods.
Q3 2020 hedge fund letters, conferences and more
Will DKS Be Able To Maintain Its Growth Rate In The Future?
To define the sustainability of the enhanced growth potential, Dicks Sporting Goods has three main competitive advantages: First, omni channel. Ecommerce platform is integrated with store fleet, providing customers with convenience and expertise. Second, shopping experience. Interactive and exciting shopping locations provide value-add service compared to both online-only retailers as well as physical retail competition. Third, exclusive brands. Brand partnerships provide access to exclusive products differentiating athletes’ shopping experience through initiatives. Exclusive private brand products are not available from other retailers.
What Can Happen For Dicks Sporting Goods Not To Be A Great Investment?
I believe Dicks Sporting Goods has two main outstanding risks: One, the greatest risk for DKS is its Nike supplier contract. As of today, Nike (NKE) is the single biggest supplier for DKS with more than 20% of all DKS’ purchases. Nonetheless, even if Nike decides to terminate its contract with DKS, as it did with Amazon, DKS still offers various private brands products, including brand DKS owns, such as Maxfli, Calia, Ethos, etc. which are brands who possess decent market share within their sub industries. Hence, not affecting as much DKS as it would if it weren’t for its unique brands. Two, extended global economic recession due to COVID-19. Global pandemic might cause extended recession, leading lower demands in the industry.
Even though, as of today, DKS has come as “the last man standing” from the economic recession, when taking into consideration physical sporting stores, thanks to its strong financials, revenue has been impacted from recession and will exercise major pressure on DKS’ financial statements if the recession continues for another year. However, I believe that DKS can counteract, as they have done so far, with their e-commerce business and BOPIS strategy.
What Is Your Potential Gain Within The Next Year?
After evaluating Dicks Sporting Goods’ growth drivers and competitive advantages and running an exhausting Discounted Cash Flow model and Multiple analysis, I believe that DKS target price should be $70 within the next 12 months. The previous considers a long-term growth rate of 4.0%, weighted average cost of capital of 11.7% and a terminal value EBITDA multiple of 8.1x.
In summary, for all the people out there, just like me, lovers of sports, DKS certainly represents a great investment for you long term portfolio. It not only possesses great growth drivers but has qualities to maintain those outstanding growth rates in the future and risks can be highly mitigated. So, what better investment than winning every time you buy in your favorite sporting goods store? Go buy DKS now!
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(Disclosure: I do not currently own Dicks Sporting Goods and all the analysis above shows my own personal view and does not guarantee in any sense a positive return. However, I plan on buying DKS in the near future)
