Dick's $10 Billion Plan Requires Patience

Anyone who follows the sporting goods sector or retail in general probably identifies Dick's Sporting Goods (NYSE: DKS  ) as a premier operator in the industry. The company has long generated strong margins and profits while expanding its retail base to grab market share from struggling competitors such as Sports Authority. Unfortunately as Dick's store base recently surged beyond 500 locations, the rate of growth has considerably stalled, leaving investors wondering if the growth years are in the rear view mirror.

During the recent analyst day, the management team laid out a 5-year plan of growing the revenue base to $10.0 billion from the $5.8 billion generated in 2012 and expanding margins via several initiatives. One of the major goals is to develop a store concept beyond the maturing Dick's brand.

The $10 billion plan

Dick's unveiled a rather tepid plan of reaching $10 billion in sales by the end of 2017. That amounts to an 11% compound annual growth rate on the $5.8 billion revenue base from 2012. Some basic principles of that plan are seeing eCommerce expand to reach approximately $1.1 billion in annual sales, growing the Dick's store base to over 800 units, and developing new concepts such as TrueRunner and Field & Stream. Currently the main target is to expand the Field & Stream brand to approximately 55 stores and $750 million in revenue by the end of 2017. The combination of the eCommerce initiative and the Field & Stream development will add over $1.6 billion of the incremental $4 billion revenue increase during the five year plan.

While the revenue goal doesn't appear ambitious at all considering the store growth potential, the real important part will be whether Dick's can achieve the goal of improving its operating margin by 150 basis points to 10.5%. Completing the $1 billion stock buyback plan, which amounts to 15% of Dick's current market cap of $6.6 billion, would also significantly add to earnings per share.

The combination of the increase in margin and the decrease in share count would have the impact of increasing last year's earnings per share from $2.53 to $3.45. Naturally that all depends on achieving the margin increase, which can be difficult in a slow growth environment, and performing the share buyback at current prices. Any revenue increase would further improve earnings.

Impressive Field & Stream opening

The biggest concern with investing in Dick's is that the primary concept has reached near saturation point with over 500 stores in 44 states. In essence, all of the easy expansion spots have been gobbled up and the process going forward will be infilling areas that have existing locations. Of course, unless one counts the plan to eventually add 14 stores to the Northern states of Montana, North Dakota, South Dakota, and Wyoming, which currently don't have Dick's locations. Outside of those expansion plans, the company is moving forward with two new concept stores in Field & Stream and TrueRunner.

The Field & Stream concept is based on the nearly 140-year-old magazine with the same name that Dick's obtained a license to use, though the concepts are unrelated. These hunting and shooting equipment focused stores are off to a great start with the first store recently opened in Cranberry Township, PA to what the COO claimed on the recent earnings call as the best grand opening in the history of the company.

The new store concept will compete against the likes of Bass Pro Shop and Cabela's (NYSE: CAB  ) . The latter provides for an interesting comparison; it operates 45 stores and plans to open an additional 19 over the next two years. Cabela's reported comp sales surged 10.5% and merchandise gross margin increased to 37.7% during the second quarter of 2013, which compares to 31.3% at Dick's. Considering that Dick's has been struggling with comp sales at its sporting goods stores, especially its golf focused retail stores, it should be no major surprise that it would attempt to shift in this direction.

Under Armour might benefit

Based on the substantial relationship that already exists via the Dick's stores, Under Armour (NYSE: UA  ) might benefit from the potential of greater exposure at these stores. The companies are already working on a partnership that has led to a store-in-a-store concept, with a target of 240 stores by year-end. Under Armour's hunting gear already has a position at places such as Bass Pro Shops and it prominently appears on members of the Duck Dynasty cast, but Field & Stream stores will likely provide more shelf space than typical local mom & pop stores.

Bottom line

Dick's has several catalysts that should help it reach $10 billion in annual sales by 2017, but the key will be whether the new initiatives can lead to margin expansion. With the stock trading at 17 times forward earnings, it doesn't offer much value until the growth potential of Field & Stream becomes meaningful in a couple of years.

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