Adversity Continues to Make Dick's Sporting Goods Stronger

In 1948, avid fisherman Dick Stack wanted nothing more than to please his boss, the owner of an Army Surplus store. When Dick's boss requested a product list for a new fishing tackle business, Dick went to work, brainstorming the best list that came to mind. The next day, the 18-year-old Dick presented that list to his boss, who responded by telling him he was a dumb kid who had no idea what he was doing. 

This is one of those points in a person's life when they must determine if they're going to be a quitter or use that adversity as motivation. Luckily for millions of sports enthusiasts, Dick chose the latter. But he also had a little help.

When Dick told this demoralizing story to his grandmother, she quickly offered a few hundred dollars from her life savings (a lot of money in 1948), and said to Dick, "Do it yourself."

By 1958, Dick had expanded his product line beyond fish tackle and into various sporting goods. He later sold the business to his son and current CEO, Ed Stack, and his siblings. Ed Stack continued to build on the store's legacy, growing the business from two to 500 stores.

And the legend continues.

Adversity builds character
Dick's Sporting Goods (NYSE: DKS  ) has been a phenomenal real-world and stock performer over the years. Of course, these things often go hand-in-hand. However, Dick's recent results have been somewhat concerning.

Dick's disappointed in the second quarter. Based on a cautious consumer, Dick's has lowered second-half sales expectations. The company also expects comps to come in at flat to 1% on the year (year over year).

This negative news would drive delicate investors out of the company. If you're looking to trade the name, then this probably wouldn't be such a bad idea considering the current economic environment. However, Foolish investors aren't swayed by short- to medium-term fluctuations. They know that investing in quality companies with strong management teams will lead to profitable returns over the long haul.

To add some confidence for long-term investors who are on the fence, I'll demonstrate how Dick's has bounced back from adversity many times in the past. But first, let's focus on what Dick's is doing to improve its performance.

Company strategy
Dick's doesn't just own 572 Dick's Sporting Goods stores. It's also the proud owner of 81 Golf Galaxy stores, and it's looking for brand expansion, opening one new True Runner store and two new Field & Stream stores in fiscal 2013. These brands are in their infant stages, which means they're also very early in their growth potential stages. Even if the worst-case scenario played out and they both failed, which is not likely, then investors should take comfort in knowing that Dick's still maintains a strong balance sheet. The company has $134.76 million in cash and short-term equivalents and $14.66 million in long-term debt.

Dick's plans on expanding its Dick's Sporting Goods presence in New Mexico, Washington, Arizona, and Louisiana. Furthermore, it's opening shop-in-shop facilities, adding salespeople for a better customer experience, remodeling several of its locations, and focusing more on high-growth areas targeting youth and women. Perhaps most important, e-commerce sales came in at $292 million in fiscal year 2012, and Dick's projects sales of $1.1 billion by the end of fiscal year 2017. 

Other players
Dick's faces some competition from Cabela's (NYSE: CAB  ) and Hibbett Sports (NASDAQ: HIBB  ) .

Cabela's targets the outdoor enthusiast, selling fishing, hunting, and camping equipment, and more. Firearms and ammunition fall into the "and more" category, and have driven Cabela's sales higher over the past couple of years. However, those sales are beginning to moderate. The good news is that Cabela's looks to keep its momentum going by opening "next-generation" stores, which cost less and generate higher sales. That's a nice combination. These stores are smaller than the usual Cabela's stores, and have a redesigned layout that is, according to Cabelas.com, "designed to surround customers in the outdoor experience" LK says: Added, from here:  http://www.cabelas.com/custserv/custserv.jsp?pageName=coloradopress and features "North American game animals recreated in their natural habitat." 

Hibbett Sports targets small to midsize markets in the Southwest, Mid-Atlantic, and Midwest, selling sports equipment. Hibbett's recently lowered its fiscal-year 2014 earnings per share guidance to $2.65-$2.77 from $2.85-$3.05. It also lowered its fiscal-year 2014 comps guidance to low single digits from low-to-mid single digits. Like Dick's, Hibbett Sports cites a hesitant consumer for its tepid forecasts. 

Based on the information above, it would seem as though Cabela's might present the best long-term investment opportunity. While that might be so, past performance often indicates management strength. Despite a great run recently, Cabela's share price has lagged its peers' over the past decade:

DKS Chart

DKS data by YCharts.

If you look at top-line performance, you will notice that all three companies have been very consistent over the past five years:

DKS Revenue TTM Chart

DKS Revenue TTM data by YCharts.

The same can be said for the bottom line:

DKS EPS Diluted TTM Chart

DKS EPS Diluted TTM data by YCharts.

Now consider some key metric comparisons:

 Company

Forward P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Dick's

17

5.50%

20.07%

0.90%

0.01

Hibbett Sports

17

8.87%

30.38%

N/A

0.01

Cabela's

16

6.00%

15.10%

N/A

1.73

Source: Company financial statements.

All three companies are fundamentally sound, but Cabela's debt-to-equity ratio is well above the industry average of 0.50. This could impede its future growth potential. However, regardless of reduced demand for firearms and ammunition, Cabela's looks to maintain its momentum with its low-cost/high-sales next-generation stores.

Hibbett Sports has managed to grow on the top and bottom line annually despite various headwinds, and it's slightly better at turning revenue into profits than Dick's. But Dick's makes up for that by offering a small yield.

The finish line
While there might be some rocky times ahead, all three companies are solid long-term investment options. Dick's looks to expand its geographical presence, remodel existing stores, focus more on high-potential markets, and grow at a rapid rate online. It has also established itself as a market leader for sports equipment. Therefore, Dick's should remain a long-term winner.

This stock is No. 1
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2681590, ~/Articles/ArticleHandler.aspx, 9/1/2014 10:30:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement