Dick's Sporting Goods (NYSE:DKS) is set to open seven new physical locations to add to its existing 725-location brick-and-mortar footprint. From Florida to Utah, these new locations will expand the company's physical presence. This defies the conventional wisdom of many analysts, who see brick-and-mortar as a pursuit to avoid like the plague.
In some respects, there's merit to Wall Street's pleas that Dick's go "all-in" with e-commerce and pull back on the development of physical stores in order to better compete with online powerhouses like Amazon and direct-to-consumer efforts by the likes of Nike. But what if I told you that Dick's is already growing e-commerce sales at a torrid pace (up 21% year over year last quarter) but that 80% of those e-commerce sales (counter-intuitively) occurred within reach of a physical location? Would that change the narrative at all?
The physical presence
Dick's Sporting Goods, in addition to operating over 700 of its namesake stores, also operates over 90 Golf Galaxy locations. Unit growth refers to the net amount of locations a company adds to its existing locations. Dick's was growing units 7% to 8% annually earlier this decade, but it has slowed in recent years, including this past year with unit growth just under 2%. To be sure, the company's strategy for growing revenue and earnings is not merely opening as many physical stores as it possibly can. Unit growth will be modest at best going forward. But modest unit growth doesn't mean a physical presence is irrelevant, as we'll see in a moment.
One of the biggest changes regarding Dick's stores is the elimination of its hunting section. This topic has proved polarizing because of the politics surrounding the gun debate. Politics aside, the company's hunting sales were under-performing, so the move to eliminate the category makes sense. The move started small by replacing this section in only 10 stores, but these locations immediately began generating positive comparable sales. That positive development prompted the company to remove the hunting section from 125 more under-performing stores in 2019.
If you eliminate an entire section from a store, you have to replace that empty space with something. And Dick's has chosen to approach this by making its stores more of an experience destination. One experience Dick's is adding is HitTrax Batting Cages. This technology will allow customers to try out baseball bats and see associated performance metrics on the screen (though it won't fix my terrible swing).
A batting cage is an experience that only a physical store can deliver. These strategic moves contributed to the company's 3.2% comparable sales increase last quarter -- the strongest comparable sale in three years.
But investors do fear the impact online retail has on traditional retail, so they want to see traditional companies excel with their own online sales. To that end, Dick's has steadily grown its e-commerce business over the past several years. In the second quarter, e-commerce grew 21% year over year and now accounts for 12% of overall sales -- over $270 million in the second quarter.
But what is interesting about Dick's e-commerce is that 80% of these sales occur within the trade area. (Just to be clear, a trade area is the area within reach of a physical store.) So how is it a good thing that people who could go to a store chose to buy online? The complementary nature of these two facets might not be obvious at first, but management points out that consumers often chose to pick items up at a Dick's store after buying online, or chose to look at the store before later buying online. That means that Dick's physical and online presences are somewhat symbiotic. Therefore, the company is smart to focus on both.
Investors would also be smart to focus on the performances of both e-commerce and the physical brick-and-mortar stores for Dick's. Specifically, in regards to e-commerce, I suggest watching the growth rate. As previously noted, e-commerce grew 21% last quarter. With the holidays and Cyber Monday on deck in coming quarters, I want to see e-commerce growth to at least maintain or even accelerate. For comparison, e-commerce sales comprised 23% of all sales in the fourth quarter last year.
In regards to Dick's physical stores, I would suggest special attention be given to how management plans to grow the in-store experience in coming quarters. The HitTrax batting cages are a good start, but I would like to see more things like this in order to believe the company is proactively keeping its stores relevant in the online age.