Is Dick's Sporting Goods Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Dick's Sporting Goods (DKS -0.87%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Dick's story, and we'll be grading the quality of that story in several ways:

• Growth: are profits, margins, and free cash flow all increasing?
• Valuation: is share price growing in line with earnings per share?
• Opportunities: is return on equity increasing while debt to equity declines?
• Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Dick's key statistics:

DKS Total Return Price data by YCharts

Source: YCharts.
*Period begins at end of Q2 2010.

DKS Return on Equity data by YCharts

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Dick's puts together a solid performance by grabbing six out of nine possible passing grades. The company's big weakness of late is falling free cash flow, which has diverged markedly from its net income over the past three years, and which seems inadequate for its current dividend payouts. Despite this issue, Dick's shareholders enjoyed solid growth over the past three years, and the stock has hit new peaks since emerging from the crash of 2008. But does that mean Dick's will keep outperforming in the future? Let's dig a little deeper.

Dick's is the largest full-line sporting goods retailer in the United States. Its national footprint boasts over 520 general sporting goods stores and 81 Golf Galaxy stores. After a strategic reevaluation that saw management decide to refocus on smaller, Dick's now envisions a market opportunity of up to 1,100 stores. Unfortunately, Dick's available cash hoard is much smaller than it was even a year ago, which means that debt-raising may be on the table to support these ambitions.

Dick's interactive "store within a store" concept gives a unique and distinct feel to each department. When you're looking for golf stuff, for example you can visit a dedicated Golf Pro Shop. It's a superior in-store experience compared to big-box competitors, and some of the company's other brand partnerships also provide Dick's with the unique opportunity to offer exclusive product to their customers. Nike (NKE 0.95%) and Under Armour (UAA 0.92%) both take advantage of having their own block of space within Dick's locations. This not only provides customers the opportunity to really evaluate the relative worth of each brand across a wide range of products, but it also gives Dick's a way to upsell its status-conscious buyers on the latest $50 compression shirt or $150 spring-loaded pair of shoes.

Dick's also rose to the top of the sporting-goods list because of its convenient locations, competitive prices and focused approach on reaching out to digital consumers through social media and apps. Dick's app has a built-in GPS that automatically helps consumers find the nearest store. You'd think this would be the first thing built into any retailer's mobile apps, but a surprising number of companies overlook or marginalize such a simple function.

Consumer interest in sporting goods has been steadily increasing in recent years, as the "fit culture" becomes a way of life for millions of desk jockeys. The global sporting goods industry is projected to reach sales of $303 billion by 2015, and the U.S. is by far the world's leading consumer of these products. However, Dick's must still contend with Amazon.com (AMZN -1.14%), which has a few dozen legs up in the e-commerce space. Just last quarter, Dick's management recognized the need to build out the company's e-commerce business, which accounted for 5.8% of the company's total sales, compared with just 3.7% a year ago. Dick's will aggressively invest in e-commerce space as the company expands its reach. At the same time, sporting goods remains one of the few retail niches that can still thrive on a bricks-and-mortar model. Until Amazon has same-day delivery for everything, all the time, there will still be something appealing in actually trying on your running shoes before you buy them.

Putting the pieces together
Today, Dick's Sporting Goods has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.