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

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.

Slice
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.

Will this stock be your next multibagger?
Give me five minutes and I'll show you how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

 


Read/Post Comments (1) | 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.

  • Report this Comment On May 23, 2014, at 10:12 AM, glaswegian wrote:

    As the head of Augusta National lamented last year, young people are not taking up golf because a) it takes too much time, b) it is too difficult, and c) it costs too much. This is not likely to change in the foreseeable future.

Add your comment.

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: 2968948, ~/Articles/ArticleHandler.aspx, 11/20/2014 9:54:18 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