If Golf Can Recover, Dick's Sporting Goods Is a Buy Today

More than two-thirds of this company is running strong, with plenty to offer investors. If the weak parts are fixed, today's price is a bargain.

May 22, 2014 at 3:35PM

With Dick's Sporting Goods (NYSE:DKS) at fresh lows, investors and analysts are left wondering if the company's game will improve going forward, especially considering management just took a hatchet to full-year guidance. As opposed to many large-format retailers, it's not the company's square footage that is hurting earnings but the specialty segments. Golf and hunting are a drag on an otherwise healthy business. At these levels, investors can get a piece of a business that is comfortably and efficiently growing its online presence, in addition to a brick-and-mortar business that can still deliver positive comparable sales despite a more than 10% decline in one of its segments. Best of all, the business is trading at its lowest and most reasonably valued level since January of 2012.

If it weren't for Golf Galaxy, the golf gear chain store also owned by Dick's Sporting Goods, the company's apparel and e-commerce segments would truly shine. With a 10.4% decline in same-store sales, the 79-store strong Golf Galaxy just isn't performing the way Dick's management hopes -- even after a few consecutive periods of similarly poor results. Nevertheless, it is expanding the footprint, albeit at a slow pace. For the full-year 2014, only one new Golf Galaxy will open. For comparison, the company plans to open 50 new Dick's Sporting Goods stores.

Going into the summer season, sales at the golf stores should pick up, but investors are rightfully concerned that this use of capital may not yield an appealing ROI. It's an extremely important issue to fix, as golf (bundled in with hunting equipment) represents 30% of total sales.

Still, investors need to keep in mind that the core business is doing well. Top-line sales grew a respectable 8%, and store-level sales grew 1.5% (including the effects of the 10.6% drop at Golf Galaxy).

The e-commerce business is becoming a greater part of Dick's Sporting Goods' overall mix. In the quarter, online sales represented 7% of the total. As are all retailers, Dick's Sporting Goods is pursuing an omnichannel retailing strategy whereby store employees are encouraging shoppers to use the online platform while the Web store does the opposite via ship-to-store pickup options. Floor salespeople are receiving tablets so they can more easily check inventory and order items without having to leave a customer's side.

Short-term blip?
With the underlying strengths of the business, Dick's is suffering almost wholly due to its golf sales. Why golf sales are so weak is a combination of three things, according to management. For one, there is too much inventory in the market as sales were hurt by bad weather in recent months and lack of demand for more than a year. As a result, sellers are discounting their products to get them out the door, which leads to lower sales and lower margins.

The second and third issues appear less cyclical, and thus more troubling. Management believes vendors' new technology in clubs and other golf goods are not registering well with customers, who are instead buying closeout items. The last issue is a general decline in the number of rounds played.

The company appears confident that these issues will correct over time (though not likely before 2014 is over), but it remains a serious concern for investors.

At its current stock price, Dick's Sporting Goods offers a fair valuation for the core business, which is growing and will continue to grow nicely in the foreseeable future. The possible advantage is if and when the golf and hunting businesses pick up again. At 13 times earnings and an EV/EBITDA of seven times, Dick's is valued as a decent retailer. If golf recovers, though, the company could see same-store sales gains in the high single digits or even into low double digits, with significant gains on the bottom line as well. That would make today's offering price a good deal for investors. For those who believe the golf issues are largely cyclical and will recover (as management does), Dick's is looking like a winner.

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