Contrarian investors are always on the lookout for short-term company setbacks that present an appropriate margin of safety with which to purchase a stock. As a result, we tend to miss companies such as Dick's Sporting Goods (NYSE: DKS). It seems never to have near-term hiccups, which is an especially impressive feat in the fickle retail industry.
Dick's reported yet another strong quarter yesterday, handily beating analysts' projections from both a sales and earnings perspective. Better yet, management increased its full-year projections by a dime -- it now expects earnings of $2.47-$2.50.
So what makes Dick's tick? For starters, it is opening new stores at a rapid pace, which leads to steady top-line growth. It also supplements internal growth with acquisitions, including the 2004 purchase of archrival Galyan's and the February 2007 buyout of Golf Galaxy. This has led to plenty of cost-cutting moves as Dick's trims the fat from acquisitions, implements inventory discipline, and enhances merchandise mix.
Speaking of Dick's product prowess, its private-label line continues to increase and, combined with savvy product selection, ended the quarter at 17.6% of total sales. This helps improve gross margin. As a case in point, during the earnings conference call, management boasted it took advantage of the cold weather in last year's third quarter by moving up the introduction of fall and winter apparel from the likes of Nike (NYSE: NKE), Under Armour (NYSE: UA), and North Face, a subsidiary of VF Corporation (NYSE: VFC).
The strong third quarter last year is expected to lead to a dip in earnings for the coming quarter, but that is not likely to qualify as a near-term hiccup. That's because Dick's is rarely caught by surprise and has informed investors of what they can expect for the balance of fiscal 2007. For the full year, it is calling for 23% earnings growth, and fiscal 2008 will bring further Golf Galaxy integration upside, as well as the customary new store openings.
With only 315 namesake stores and 77 Golf Galaxy stores, Dick's has plenty of room to expand. Management plans to grow its store base 15% annually until it reaches 800 stores, implying at least another five years of expansion before any significant market-saturation concerns. Growth investors are likely salivating at these prospects.
I personally don't see much downside protection if growth at Dick's fails to live up to expectations. The sporting goods industry is ultra-competitive, served by regional competitors such as Hibbett Sports (Nasdaq: HIBB) and national giants such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). Additionally, some of Dick's products, such as men's and women's sporting apparel, are fashion-based and exposed to the whims of fickle consumers. These factors haven't slowed Dick's down to date, but at some point could lead to a quarterly earnings miss that would unlock an undeniably appealing entry point into the stock.
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Fool contributor Ryan Fuhrmann owns shares of Nike but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss companies mentioned. The Fool has an ironclad disclosure policy.
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