Please ensure Javascript is enabled for purposes of website accessibility

Is Discounting a Growth Opportunity for Dick's Sporting Goods?

By Rich Duprey – Jun 22, 2020 at 12:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

New off-price chains could let the sporting goods leader regain some lost traction.

Dick's Sporting Goods (DKS -1.89%) is expected to be the last man standing in the sporting goods retail space because the investments it's made in its omnichannel capabilities allow it to be flexible to meet challenges, such as those it experienced during the coronavirus pandemic.

Yet the largest sporting goods store doesn't have much of a competitive advantage other than its size, and even then the gear and accessories it sells can be found at larger rivals like Walmart or Amazon.com.

Without much of a competitive moat, Dick's needs something new to differentiate it, and its recent decision to expand into the off-price market may be what it needs. The sporting goods retailer will soon have 11 new discount stores in operation over two separate concepts, and though they provide a level of risk, they may also help juice sales and margins.

Man and woman throwing a workout ball

Image source: Dick's Sporting Goods.

Working overtime on discount warehouses

Dick's recently announced it would be expanding the footprint of its Overtime by Dick's Sporting Goods and Dick's Sporting Goods Warehouse stores. The Overtime concept gives consumers access to apparel and footwear from major brands like Nike (NKE -3.50%), adidas, and Under Armour at prices of up to 75% off. The Warehouse concept is similarly positioned, but will offer discounts of up to 90%.

Nike is Dick's largest vendor, representing 21% of its $8.75 billion in annual sales, or about $1.83 billion. And though no other vendor accounted for more than 10% of sales, adidas and Under Armour remain significant suppliers.

Whether they will appreciate their goods being sold at such large discounts when they're trying to increase their own reach through direct-to-consumer channels is unknown, as is why Dick's thought it needed two different off-price chains.

Room to grow

Dick's began with three off-price locations last year, opened five more last week, and will add three more, expanding its presence in nine states. It could be a growth opportunity, particularly coming out of the pandemic where record numbers of people were unemployed and home fitness was a hot trend. The limited discretionary income and greater awareness of health, wellness, and fitness could be a powerful combination for the new chains.

Dick's is also reopening all of its full-price stores by the end of the month, but a discount option could prove more attractive to consumers.

Off-price retailers like TJX, Burlington Stores, and Ross Stores have been among the best performers over the past few years, though even they were caught off guard by the shutdown orders for non-essential retail.

Because their e-commerce operations are a secondary consideration to the treasure hunt atmosphere created by their physical stores, they were not able to respond as effectively as other retailers, including Dick's, that invested in omnichannel options. It was these investments that allowed the sporting goods leader to respond as it did during the crisis.

Digital expertise

E-commerce had already evolved into a $1.4 billion business for Dick's last year representing 16% of total revenue, up from $500 million in 2013. Although it reported a wider-than-expected loss in the first quarter of $1.71 per share, the ability to relatively seamlessly transition to curbside pickup, for example, allowed online sales to surge 110% year over year.

Yet there are limitations to its growth. Although comparable sales came in at 3.7% in 2019, above the 2% to 3% guidance Dick's offered, and fourth-quarter comps were up almost 6%, the retailer had forecast just 1% to 2% comps growth this year before the pandemic caused it to withdraw its guidance.

That's where the off-price stores can help, juicing more visits from consumers coming in to find top-name gear at deep discounts. 

A different kind of Dick's

Yet these are not like regular Dick's stores where there are departments for bicycles, fishing gear, or exercise; instead, they sell just clothing and footwear. But where Overtime and Warehouse give Dick's avenues to unload excess inventory it has undoubtedly built up during the crisis, they will also eat away at margins.

Dick's operating and net margins have eroded over the years and it will feel greater pricing pressure at its full-price stores from other retailers who also have a lot of built up merchandise they couldn't sell during the pandemic. 

While these new discount stores are few in number compared to the 726 stores Dick's operates, it has to be careful not to cannibalize full-price store sales. Plenty of retailers have been lured in by discounting only to discover it undermined profit margins and brand cachet.

Dick's Sporting Goods needs something to keep it on top of its game now, though, and these off-price centers could be what it takes.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends The TJX Companies and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dick's Sporting Goods, Inc. Stock Quote
Dick's Sporting Goods, Inc.
DKS
$109.98 (-1.89%) $-2.12
Walmart Stock Quote
Walmart
WMT
$128.54 (-2.38%) $-3.14
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$114.39 (-4.91%) $-5.91
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$87.02 (-3.50%) $-3.15
Ross Stores Stock Quote
Ross Stores
ROST
$86.62 (-1.84%) $-1.62
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UAA
$7.01 (-3.97%) $0.29
The TJX Companies Stock Quote
The TJX Companies
TJX
$64.35 (-1.14%) $0.74
adidas AG Stock Quote
adidas AG
ADDYY
$56.11 (-4.67%) $-2.75
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UA
$6.28 (-3.68%) $0.24
Burlington Stores Stock Quote
Burlington Stores
BURL
$118.67 (-2.95%) $-3.61

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
338%
 
S&P 500 Returns
108%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.