Dick's Sporting Goods (NYSE:DKS) has been running up the score this year.
Shares of the retail chain are up 64% this year, and it's clear why. A raft of bankruptcies have washed over the sporting goods industry, leaving Dick's as the last man standing aside from a couple of exceptions like Big 5 Sporting Goods.
Among the bankruptcies:
- The Sports Authority, which closed all 450 of its stores when it failed to find a buyer earlier this year.
- Vestis Retail Group, which includes Eastern Mountain Sports, Sport Chalet, and Bob's, filed for Chapter 11 and said it would close Sport Chalet and restructure EMS and Bob's.
- Golfsmith, which has 109 stores across the country, said it would file Chapter 11 bankruptcy in September.
- City Sports said it would close all 26 of its stores late last year.
There were a variety of reasons for those bankruptcies, with unsustainable debt burdens being at the top of the list, and Dick's has clearly taken advantage this year. Dick's acquired the Sports Authority's brand name and took over leases for 31 stores, 22 of which it will convert to Dick's. It made a similar bid for Golfsmith, scooping up its entire business for $43 million, and said it planned to keep open 30 stores, which it will convert to its Golf Galaxy brand.
Financially, Dick's has been benefiting as well. Same-store sales are projected to increase 3-4% this year, after falling 0.2% last year, and jumped 5.2% in the third quarter. Liquidation sales at Sports Authority hurt performance earlier in the year, but adjusted EPS is expected to grow by 4-9% this year.
Now it gets tougher
Analysts see a jump in EPS of more than 20% next year as Dick's reaps the benefits of thinned-out competition, but there's a troubling trend behind the industry malaise.
It's no secret that retailers across the board have been struggling to adapt to e-commerce. Amazon (NASDAQ:AMZN) has hollowed out once-thriving retail industries like books and electronics, and even department stores. And it's not just the Amazon effect that is pressuring sporting goods retailers. Big apparel brands like Nike (NYSE:NKE) and Under Armour (NYSE:UAA) are increasingly focused on direct-to-consumer sales, building out their own e-commerce businesses and brand stores so they don't need to depend on a middleman. Under Armour learned that lesson the hard way when it was forced to cut its guidance after Sports Authority declared bankruptcy. Nike expects half of the growth needed to reach its 2020 $50 billion revenue goal to come from direct-to-consumer sales, which today make up just about a quarter of revenue.
For retailers like Dick's, that means the biggest suppliers are becoming the biggest competitors. One sporting goods exec told the website Racked, "I now compete with 90% of my suppliers via e-commerce, physical stores, or a combination of the two. The importance of the retailer as a pipeline to the consumer has been greatly diminished."
And Dick's can hear Amazon's footsteps behind it, as the e-commerce giant is set to grow North American retail sales by about 25% this year. Amazon doesn't break out sales by product segment, but it's almost certain that its sporting goods department is outgrowing Dick's.
The sporting goods retailer isn't standing still -- the company has built out its own e-commerce business, which now contributes nearly 10% of sales, similar to e-commerce trends nationally.
We've seen this trend play out in other retail sectors before. While it was considered a boon for Barnes & Noble when Borders shuttered, B&N is still struggling to turn a profit years later. Abercrombie & Fitch has seen peers like American Apparel and Aeropostale file for bankruptcy, but its profits are still drying up.
Though competitor failures often offer a short-term boon to industry peers, over the long term they're usually a sign of deeper problems.
With Nike and Under Armour carving out their own paths and Amazon rapidly growing sales, Dick's recent surge may come to an end sooner than expected.