Dick's Sporting Goods' (NYSE:DKS) growth strategy since at least 2017 has been to develop and focus on its own brands -- CALIA, Field & Stream, and Tommy Armour Golf Clubs are three examples -- and rely less on big names such as Nike (NYSE:NKE) and Under Armour (NYSE:UA) (NYSE:UAA). By May 2018, the company's own-brand portfolio seemed to be a winning one, as growth outpaced total sales with double-digit comp sales.

At that time, Dick's CEO, Edward Stack, predicted that business would hit $2 billion in sales in the near future. Stack explained:

Our private brands remained strong, growing double digits. As a percent of total net sales, our private brand sales increased to approximately 14% compared to 12% last year. In 2019, we expect continued strength as our private brands will play an important role in our space allocation and assortment strategies.

True to his word, Stack reported in late August that Dick's Sporting Goods beat earnings and sales expectations. Same-store sales for the second quarter increased by 3.2%, which was the strongest quarterly comparative sales gain since 2016. Also, second-quarter 2019 earnings per diluted share were $1.26 compared to $1.20 per diluted share in the prior year. As a result, Dicks raised its full-year 2019 diluted EPS guidance to $3.30 to $3.45, up from $3.20 to $3.40. The company also exhibited confidence in future growth by repurchasing $159 million of common stock in the second quarter.  

Dicks' focus on its own brands seems to be working, but can it support the investment that the strategy requires? And will that be enough? Let's look at the financials around own-brand sales, how debt plays a role, and how new digital efforts are helping Dicks improve the bottom line.

A woman in athleticwear takes off running.

Dicks own-brand apparel is starting to pay off. Image source: Getty Images

Debt levels and dividends are under control

Investor enthusiasm for Dick's has been at a low ebb over the past few years due in part to an increasing debt level: 0.8% five years ago compared to 25% today. However, the company's debt is easily covered by cash flow. The company's recorded free cash flow accounts for 64% of its earnings before interest and taxes, so Dick's has the capacity to reduce its debt if it needs to. 

As far as dividend payouts are concerned, Dick's Sporting Goods' payout ratio is modest at just 30% of profit, and the company generates enough free cash flow to comfortably finance its dividend. Dividends consumed 60% of the company's free cash flow last year, which is within a normal range.

As long as earnings don't drop precipitously, the company can sustain its dividend payouts. A steep drop in earnings is unlikely considering the retailer's competitive advantage as the largest U.S.-based, full-line omnichannel sporting goods retailer. More importantly, Dick's' brick-and-mortar outlets are prominently positioned in many of the nation's malls, making it the "go-to" sports apparel and equipment supplier. The better-known brands tend to rely more on direct-to-consumer online sales channels.

Digital could be dynamite for Dick's

On the digital front, Dick's divested itself of its Blue Sombrero digital platform in August, selling it to Stack Sports and allowing Dick's to focus on equipment and apparel. However, Dick's and Stack Sports have now entered into a strategic partnership.

Dick's is now the official sporting goods retail partner of Stack Sports, and Stack Sports is now the official club and league technology partner of Dick's. The new partnership will mean that Dick's will have some play in the mobile team management software market. Parents and coaches are increasingly using mobile digital tools to manage children's sports' schedules and activities. 

Leveraged to its fullest extent through discounts and incentives for users of the app, Dick's has inroads to sell its merchandise into a growing market that Slack Sports services.

What it all means

Dick's has struggled in recent years with how to navigate its relationship with sport apparel stalwarts Nike and Under Armour. Cultivating its own brands to help mitigate the outsized effect that fluctuating sales of those two companies' products has on the bottom line is a smart strategy, especially as Nike and Under Armour have been adjusting their own strategies to bring more of their sales in-house. And now that Dick's in-house brands are taking off, its new partnership with Stack Sports could help boost sales further.

One area of concern for the company is debt. But if it keeps it under control, Dick's should continue to be a growth stock -- or at least a slow-growth stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.