Is Dick's Sporting Goods a Good Buy Near Its 52-Week Lows?

Dick's Sporting Goods got off to a bad start with its first-quarter results, but can it improve?

Jun 23, 2014 at 2:30PM

According to Lucintel, the global sporting-goods market is expected to be worth $266 billion in 2017, representing a compound annual growth rate of 4% from 2012 to 2017. North America currently dominates this market with players like Dick's Sporting Goods (NYSE:DKS), Big 5 Sporting Goods (NASDAQ:BGFV), and Hibbett Sports (NASDAQ:HIBB). So, the opportunity is quite big, and Dick's Sporting Goods looks well positioned to make the most of it.

A weak performance
Dick's Sporting Goods was beaten down to a 52-week low after it reported first-quarter results. According to Bloomberg, the company suffered its highest-ever decline since it became listed in October 2002. Investors punished Dick's for reporting lower-than-expected earnings of $0.50 per share, missing its own guidance and consensus estimates.

The company saw weakness in its golf-equipment and hunting-gear businesses, which together constitute about 30% of sales. As a result, comparable-store sales, or comps, came in lower than expected. In addition, the harsh winter weather also played spoilsport. However, adjusted earnings were approximately 4.2% higher than the year-ago quarter.

Dick's earnings improved, as its top line grew 7.9% versus the prior-year quarter to $1.4 billion. However, it missed the consensus estimate by $100 million. The growth in the top line was fueled by new store openings, year-over-year comps growth of 1.5%, and robust gains in its e-commerce business. Excluding the golf and hunting businesses, comps grew 6.6% year over year.

Expansion in the cards
Dick's Sporting Goods recently opened its 24th store in Illinois, taking the tally to 571 in the country. In addition to existing in-store kiosks, the full-line, omnichannel sporting-goods retailer is equipping its associates with tablets to check inventory across the company's network and to order items for customers without leaving the sales floor. This will offer customers an endless-aisle experience once it's rolled out to all stores after the pilot phase is completed.

By year-end 2017, Dick's has set a target for $10 billion in annual sales. It intends to achieve this on the back of e-commerce and omnichannel initiatives, technology investments, and unit growth.

From 2002 to 2012, Dick's e-commerce sales grew at an impressive CAGR of 41%. In 2014, it plans to remodel Golf Galaxy to an in-sourced, multi-store e-commerce platform. In 2015, the company plans to integrate omnichannel website capabilities and to finally relaunch the Dick's Sporting Goods e-commerce site. Also, Dick's Sporting Goods will increase its store count to 800 stores by 2017.

Although the company faces near-term challenges due to its underperforming golf and hunting businesses, the long-term growth story looks solid. Dick's is positioning itself to make the most out of the projected growth of the industry through 2017. However, it will face competition from the likes of Big 5 and Hibbett.

Gauging the competition
Big 5 has more than half of its stores in California, and around 44% of its new stores opened since 2009 have been in California. With Dick's expanding into the California market, Big 5 has a credible threat. Dick's is capable of taking away share from smaller peers, including Big 5, as smaller rivals don't have the financial muscle or the economies of scale to fight against bigger peers. In fact, Dick's cash position of $140 million is far stronger than Big 5's $6 million, which will allow it to expand aggressively into new markets.

Moreover, Big 5's performance has been unimpressive of late. It posted a 6.1% year-over-year decline in sales during the first quarter, primarily because of weakness in firearm and winter-related products. Comps declined a massive 7.9% as compared to a 10.5% increase in the year-ago quarter. Earnings per share came in at $0.10 and were within the guided range.

On the other hand, Hibbett Sports' first quarter was a mixed bag. It missed on the earnings estimate by a penny despite registering 9% growth versus the year-ago quarter. The earnings performance was fueled by robust 9.1% year-over-year sales growth. The top-line growth was on the back of a 4.1% year-over-year increase in comps fueled by a strong performance in the branded-apparel and footwear businesses.

Looking forward, Hibbett plans to open 65 new stores by year-end. The company is also executing the first phase of its omnichannel strategy centered on two things. First, it is firming up the information technology infrastructure by investing in technology, people, and processes. Second, it is upgrading its in-store technology and hardware, including points-of-sale. As Hibbett works on the omnichannel and other initiatives, its performance can improve going forward.

The takeaway
Dick's has got the financial muscle to tap the opportunity in the sporting-goods retail market. Although it missed consensus estimates in the previous quarter, Dick's focus on physical store expansion and the omnichannel platform should result in strong growth. Moreover, as the stock is down around 22% this year, investors should consider picking up some shares, as it could get better in the future.

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Prabhat Sandheliya 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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