Dick's Sporting Goods Inc. Is Telling You to Buy These 2 Stocks

Dick's quarter was filled with disappointment; but within its conference call the company speaks of many strong industries, in which two companies will benefit.

May 29, 2014 at 5:30PM

The broader retail industry's performance has been borderline pathetic in the second quarter. Unfortunately for its shareholders a notable standout to this underperformance is sporting goods retailer Dick's Sporting Goods (NYSE:DKS). Yet, in spite of its poor performance, analysts acknowledge that some segments of retail are solid, and a company like Dick's that sells various products can be a good indicator of demand. This bodes well for lululemon athletica (NASDAQ:LULU) and Under Armour (NYSE:UA).

Horrible quarter on the surface
Typically, retail investors make the mistake of identifying a company's stock performance, glancing at revenue and earnings-per-share numbers, and then making an assumption about a quarter. However, so much can be learned by reading SEC filings along with listening to conference calls. In the case of Dick's, this is especially true.

The company posted a horrible quarter. Specifically, its hunting and golf segments, which account for 30% of the total revenues, were most responsible for the company's weakness; its Gold Galaxy stores saw a 10.4% decline in comparable sales, while its golfing segment at Dick's saw a high single-digit comparable sales decline.

Women's athletic apparel shines
Yet, despite the company's weakness, net sales still increased 8%, driven by a consolidated same-store sales increase of 1.5%. So, this means there were strengths within the business, and women's athletic apparel was one of them.

On the conference call, management stated that comparable sales in the women's category rose in the low teens and that a double-digit rise in inventory was due to its initiative to boost floor space in the category.

Specifically, Dick's management is talking about companies such as Lululemon, a retailer focused on women's athletic apparel. This is a company that's had a tough run over the last year, with its stock down 45%. Lululemon has seen its comparable-sales growth decelerate, including a decrease of 2% in its last quarter, which marked the first decline since its public market debut.

Nonetheless, Dick's outlook points to a recovering market for Lululemon, or at least increased demand, which should bode well for the stock.

Dick's strength implies it's time to buy this one stock
In addition to women's apparel, there were some other strengths in the quarter and favorable long-term trends. For example, here's a quote from Dick's CEO Ed Stack:

Our women's athletic apparel initiative is providing great results with comps in the low teens, (and) our youth athletic apparel businesses are even better than the women's business, although off a smaller base. Team sports along with footwear have been strong as well.

The above statement is Under Armour in a nutshell. While Under Armour is known for its men's clothing, the company has quickly become a dominant player in women's apparel, team sports, footwear, and also youth athletic apparel, which has grown revenue for both it and Dick's.

Specifically, Under Armour's shoe sales are outpacing revenue growth expectations of 24% for 2014, growing by more than 25%. Its Women's StudioThis is the name of the line workout line of clothing also saw accelerated growth in the back half of 2013, which combined with training and basketball grew 33%. Lastly, Under Armour's overall women's segment surpassed $500 million in total revenue last year, making it more than 20% of the company's total business.

Final thoughts
Lululemon investors have been seeking some sign that demand is rising, and Dick's may have just provided it. Likewise, all the segments where Dick's notes strength are those where Under Armour has a large footprint and is seeing accelerated growth.

Notably, shares of Lululemon are significantly off their 52-week highs, but Under Armour shares have also seen large losses of nearly 25% from highs. Lululemon reports earnings on June 12, and Under Armour has yet to announce a date; but the estimate is late July. Hence, it's possible that given Dick's macro outlook combined with lower expectations, shares of both Lululemon and Under Armour could soon reverse prior downtrends.

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Brian Nichols owns shares of Under Armour. The Motley Fool recommends Lululemon Athletica and Under Armour. The Motley Fool owns shares of Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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