Moat Report Card: Dick's Sporting Goods

In the moat report card series, we test for the presence of a moat by analyzing the returns a company generates on the funds it invests – its ROIC.

1. Over time, has the company earned a sufficiently high ROIC?
2. Is the ROIC of high quality?
3. Is the company maintaining and growing the returns it earns on invested capital?

For a full explanation of the score card, click here.

Here is a look at Dick's Sporting Goods' (NYSE: DKS) returns on capital to help us assess its moat.

ROIC history
Let's see how Dick's three-year rolling ROIC has changed over time and in relation to its nearest competitor, Hibbett Sports (Nasdaq: HIBB):

Data from Capital IQ, a division of Standard and Poor's.

Dick's has earned rolling three-year returns on capital greater than 14% for each period since 2004 – that's good enough to classify as sportingly profitable and earn a perfect 5 for the first part of the Moat Score Card.

As a retailer of sporting goods and athletic apparel, Dick's has more than 400 stores in 40 states. However, Dick's big-box strategy is not nearly as profitable as its smaller rival, Hibbett Sports. Hibbett has scored impressive rolling returns that have averaged 30.7% over the past five years. While Dick's stacks up on par with fellow sports enthusiast Big Five Sporting Goods (Nasdaq: BGFV) and its West Coast presence, we can't ignore the clutch performance of Hibbett.

ROIC quality
Just like return on equity, there are only so many ways a firm can juice its ROIC. The three levers are profit margins, asset turnover and leverage. Here are the data for Dick's:

Data from Capital IQ, a division of Standard and Poor's.

With after-tax operating profit margins caught in a rundown between 3% and 4%, Dick's relies on its ability to get customers in the door and sell its wares. The company has been able to improve its asset turnover and applied a little extra leverage to help make up for its sagging profit margins. Still, both margins and turnover lag Hibbett. Applying industry standard leverage to Dick's operating performance highlights the solid returns the company generates – still surpassing our 10% hurdle and besting the industry average ROIC. As a result, Dick's scores 4 out of 5 in ROIC Quality.

Data from Capital IQ, a division of Standard and Poor's.

As a whole, the industry has seen its rolling ROIC cut in half over the past five years. Dick's scores points for performing better than the industry, but gives that goal right back for falling short of Hibbett yet again.

Pencils down!
With all the numbers in, here's how Dick's scored:

While Dick's Sporting Goods earns a C on its Moat Report Card, let's remember how we got here. In absolute categories, Dick's scored pretty well. The company's store-within-a-store layout makes fans of its customers, and its large scale gives it a leg up with suppliers. These factors have helped it earn rolling returns on capital well in excess of 10% over an extended period of time. Furthermore, its returns have declined at a rate slower than most of its competitors, indicating that Dick's is holding its own.

But when compared to small-town sporting goods retailer Hibbett Sports, Dick's consistently finishes in second place. Because the two have different strategies, there may be room for both atop the sporting-goods podium. Remember to look forward and assess whether Dick's will be able to fend off threats from other retailers (especially on the Internet), buy at a reasonable valuation, and your portfolio will stand a better chance of surviving the scratches and flesh wounds that the market dishes out.