The largest sporting goods retailer in the U.S. is Dick's Sporting Goods (DKS 2.46%), and its stock is down 50% in 2020 year to date. To be sure, business is not great at the moment -- its stores have been closed since March 18 due to the COVID-19 pandemic.
Those who sold the stock surely believed it was the right decision, but could it actually be a smart contrarian move to buy Dick's stock right now? The answer is complex.
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A simple reason to buy
Being a sporting goods retailer isn't the easiest business. The space has seen prominent bankruptcies in recent years like Golfsmith and Sports Authority. As other retailers struggled, Dick's remained stable and even benefited by gaining some of its defunct competitors' customers.
Considering Dick's is the largest player and one of the strongest, it's enticing to snag shares at a serious discount. They haven't been priced this low in a decade.
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To keep things simple, the lower the better for valuation metrics like price to earnings and enterprise value to EBITDA. For dividend yield, the higher the better. All of these backward-looking metrics show Dick's Sporting Goods to be a value stock at the moment.
A simple reason to avoid it
Looking at past results isn't an accurate representation of the present reality or the company's future prospects. Dick's is closed. However, e-commerce accounted for 25% of the company's sales in the fourth quarter of 2019, and management noted that e-commerce has exceeded expectations while stores are closed. But it's doubtful these online sales come anywhere close to replacing lost revenue.
Even if Dick's stores were open, it's likely that sales would still be down. The Census Bureau released results for retail sales in March, and sporting-goods sales were down 23.3% for the month. It makes sense -- kids' sports are canceled around the country, and discretionary purchases are challenged due to rising unemployment and an economic downturn.
Because of this, Dick's Sporting Goods management made some tough decisions. Executives have taken pay cuts, many employees have been furloughed, and the company has suspended its share buyback program and its dividend payout.
This is the present reason to avoid Dick's stock. Revenue and net income are taking a hit. And by suspending share repurchases, earnings-per-share growth will disappear. This company grew earnings per share 11% from 2017 to 2019 by reducing its diluted share count 17% during that time. And right now, there's not even a compensatory dividend to reward those patiently awaiting a rebound.
A more nuanced look to the future
In investing, we take the past and present into account but always with a focus on the future. Sports have always been a part of humanity around the globe, from the Mayans playing ball to the ancient Olympic games. I'm confident sports will return after the coronavirus and sooner than some might expect.
Dick's Sporting Goods has worked hard for its stores to become destinations. Even in the age of e-commerce, there are some products that you want to physically handle before buying like a baseball bat. You want to know how it feels in your hands as you swing, and that's why Dick's installed batting cages in some stores. By providing services only a brick-and-mortar store can, this business can stay relevant for the foreseeable future.
But there's a real threat to Dick's Sporting Goods' business. Consider that Nike (NKE 3.96%) is the best-selling brand at Dick's. With both Dick's and Nike stores closed, that only leaves the possibility of e-commerce. Given the choice of where to shop for Nike products, it's only logical to buy direct from Nike. Indeed, Nike's digital channel grew 36% in the third quarter of fiscal 2020 (which ended Feb. 29).
It's likely that brands such as Nike will double down on their direct-to-consumer businesses because of the pandemic. That's a direct threat to a business like Dick's and a good reason to be leery of its long-term prospects.
But this isn't new. Perhaps this shift is accelerating, but Dick's isn't completely unprepared. Private-label brands together are now the second largest category for the company. Having launched its CALIA brand of fitness wear five years ago, and its DSG label last year, private brands now make up about 14% of total sales.
So I expect sports to stay relevant in the future and for Dick's Sporting Goods to stay relevant in sporting goods. The company won't grow its top line by impressive numbers -- from 2017 to 2019, full-year revenue rose less than 2%. But the company has proved it can be profitable, and the company makes a habit of rewarding shareholders by repurchasing shares and paying a dividend. While those two activities are on hold, they should return when the business rebounds. In short, I'm holding my shares, but it's also a good time to buy when the stock trades near multi-year lows.
