Can Dick's Sporting Goods Exit the Penalty Box?

Investors sent Dick's Sporting Goods in to the penalty box, but is the company setting itself up to score on a powerplay?

Jun 6, 2014 at 9:00AM

It was an extremely ugly day for Dick's Sporting Goods (NYSE:DKS) shareholders when the stock collapsed following the company's first-quarter results on May 20. However, despite the top- and bottom-line misses, Dick's Sporting Goods is a good investment. Here's why.

Moving away from golf
Dick's Sporting Goods reported a first-quarter comparable-store sales gain of 1.5%, missing the company's prior guidance of a 3% to 4% gain. One of the main culprits was weakness in golf sales. Dick's Sporting Goods' golf shortfall was due to industry-related issues, not because of weather or company-specific issues.

According to the National Golf Foundation, around 400,000 players gave up on the sport last year, which obviously doesn't bode well for Dick's Sporting Goods. As a result of declining interest in the sport, golf sales declined in the high single digits at Dick's Sporting Goods, while Golf Galaxy saw sales decline by 10%. The good news is excluding golf and hunting, Dick's Sporting Goods saw a 6.6% comp gain in the quarter, showing that the underlying business is still very strong.

Dick's Sporting Goods recently decided to reallocate floor space to better sell higher-margin and popular categories. As such, the company will allocate space toward women's athletic apparel, which is delivering comps in the low teens. Additionally, youth athletic apparel, according to management's comments, is "even better than the women's business."

By replacing troubled segments and allocating prime shelf space to higher-margin categories, Dick's Sporting Goods could make its stores more attractive. Meanwhile, it doesn't have to sacrifice its image as a retailer that offers a complete assortment of sporting goods.

Consumers are still shopping
Dick's Sporting Goods said during its first-quarter conference call that new store productivity was 98.1%, implying new stores are performing in line with existing stores.

In terms of e-commerce, Dick's Sporting Goods now ranks as No. 72 on the Internet Retailer Top 500 list, up from No. 94 last year; the company made improvements to its e-commerce platform including search engine optimization capabilities. Dick's Sporting Goods continues to roll out its buy online/pick up in store capabilities. Additionally, all stores include ship-from-store fulfillment capabilities.

Dick's Sporting Goods could benefit in the coming few quarters and see increases in sales from higher-margin fall athletic apparel, back to school footwear, and a potential pickup in soccer-related sales due to the World Cup. That being said, investors should not be surprised to see a drastic improvement in the company's earnings report when it finalizes its floor space reallocation.

The safer, but similar, play
While the case could be made that Dick's Sporting Goods can successfully turn itself around, Foot Locker (NYSE:FL) doesn't need to make that case given the fact that its business is still strong. Foot Locker reported comparable-store sales growth of 7.6% and double-digit revenue growth in its first-quarter results on May 23.

Much like Dick's Sporting Goods, Foot Locker sees store transformation as a viable strategy to drive sales of high-margin items, and it is already paying off! Richard A. Johnson, Foot Locker's chief operating officer, said during the company's first-quarter conference call:

The premium tees, tanks, fleece, and shorts that hook to our footwear did well, especially in Jordan and Nike signature basketball. Our remodeled stores showcase this apparel particularly well, and apparel sales were up in these stores.

Foot Locker management said that the majority of its stores have yet to be remodeled, providing investors with a teaser of what to expect over the coming quarters and years. Additionally, Foot Locker plans to open Kids Foot Locker stores in certain markets given the high-margin nature of the category.

Foolish take
Investor sentiments were relatively low heading into the earnings report but worsened after the company's revised guidance to the downside was much worse than feared.

Dick's Sporting Goods shares lost significant value and are currently trading near 52-week lows. Investors are perhaps underestimating the company's national scale and superior vendor relationships. Additionally, despite recent headwinds, management is taking an active approach in shifting merchandising with consumer preferences and improving its e-commerce site.

Dick's Sporting Goods remains a good company, and with investor sentiment severely low, now may be a good time to buy shares. On the other hand, investor sentiment on Foot Locker is high, as the company continues to impress investors with strong results. Dick's Sporting Goods is obviously the riskier of the two companies, but investors with an appetite for risk should choose Dick's Sporting Goods over Foot Locker.

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Jayson Derrick has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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