Dick's Sporting Goods Gets Kicked by an Analyst Downgrade

On this Market Foolery segment, host Chris Hill and Million Dollar Portfolio's Jason Moser consider the situation of Dick's Sporting Goods (DKS -1.74%), which anyone would have expected to benefit from the failures of a number of its competitors. But its shares are in a long 40% slump in the past year, and they may not bounce back anytime soon. Among the reasons: Under Armour (UA -1.44%) (UAA -1.61%) and Nike (NKE -1.71%) are selling more of their products directly, and e-commerce and apps are eating the company's lunch.

A full transcript follows the video.

This video was recorded on July 10, 2017.

Chris Hill: One more sporting note. Dick's Sporting Goods shares are down 6% today off an analyst downgrade. This is a little surprising to me in this regard. One of the big stories in retail last year, certainly when you're looking at sports retail, was Sports Authority going bankrupt, going out of business. And by the end of August, Sports Authority had closed all of their locations. And since that time to today, shares of Dick's Sporting Goods, the No. 1 competitor to Sports Authority, and one you would absolutely be forgiven for thinking would benefit from Sports Authority going out of business -- shares of Dick's Sporting Goods are down almost 40% since the end of August last year, when Sports Authority disappeared from the plane.

Jason Moser: Yeah. And I'll tell you, I don't know that it's reasonable to expect these guys to bounce back anytime soon. I was talking on Twitter with some folks a week or so ago, back and forth, with Nike's recent earnings, and the investments that Nike is making, for example, in their direct-to-consumer part of the business. That's up to 26% to 28% of the overall revenue that they're bringing in annually. You look at Under Armour doing the same thing. They're investing more and more in the direct-to-consumer, which means they're relying less and less on the middlemen like Dick's Sporting Goods. And I'll throw Foot Locker in there as well. These guys, Foot Locker and Dick's Sporting Goods, rely a lot on those two brands, on Under Armour and Nike. They sell a lot of that stuff. And I think, in the case of Dick's Sporting Goods, Under Armour and Nike combined make up more than a third of their inventory they keep. So if someone is saying, I can just buy it directly from the source via Nike or Under Armour, why do I need to go to Dick's Sporting Goods?

And clearly, people are buying from Nike and Under Armour directly. In the most recent earnings release, Nike noted they made more than $2 billion this last year in sales on their family of apps alone, primarily the Nike app. But, Under Armour is doing the same thing. Whenever I buy anything from Under Armour, I just go directly to that app. They have everything saved. They know what I'm looking for. So it's a very pleasant experience. It's easy. They're keying in on free shipping, free returns; they know what the consumers like. And it makes the hurdle that much tougher for these physical footprints that Dick's Sporting Goods and Foot Locker are holding.

Dick's is typically going to be that big standalone store. Foot Locker, I think, is in a lot of malls, and they're not necessarily feeling all that great about that right now, either. So I think you look at Dick's Sporting Goods and Foot Locker, those are two companies I would be very wary of investing money in today. I'm not saying I'd short them, but I certainly feel like if you're going to invest in this market, it's easier to go ahead and invest in something like a Nike or an Under Armour, because the direction where that is headed, in the direct-to-consumer, they're making all those big investments. And they are paying off.

Hill: I'm assuming, though, that Foot Locker does better in terms of revenue per square foot, just because the locations are so much smaller.

Moser: Yeah, the locations are smaller. That's certainly the point.

Hill: You have to get more drop-in traffic than at Dick's. You go to a store that size, you are intentionally going there, whereas if you're just walking around a mall, it's easy to go, "Oh, let's just pop in here."

Moser: Yeah. I would imagine the traffic that goes to a Dick's Sporting Goods store is more intentional versus a Foot Locker where certainly it's going to be intentional, but I would also think the percentage of incidental traffic there is going to be much higher because of that mall setting. Again, you look at those mall numbers -- it seems like the traffic is dwindling. We've talked about companies that have strong mall presences, Starbucks being one where, thankfully it's so big and they have so many stores all over the world in all sorts of settings, I don't think they're going to feel the same kind of pinch that Foot Locker might, because that product that they're selling is so specific, and people know when they're going there and what they're trying to buy.