While the sports retail space has seen dramatic and depressing decline in the past decade, Dick's Sporting Goods (NYSE:DKS) has reported impressive growth and plans to open up even more stores this year. The company also stands poised to scoop up some of the assets of rival Sports Authority, which is in bankruptcy protection, or perhaps gain from its demise.
In this segment from the Industry Focus: Consumer Goods podcast, Vincent Shen and Sean O'Reilly talk about what Dick's is doing right compared with the rest of the retailers in the space -- and how its current valuation looks in light of the growth the company plans to see in the future.
A full transcript follows the video.
This podcast was recorded on April 19, 2016.
Vincent Shen: So, talking about some of the companies that have struggled, why they've struggled, I also wanted to talk about Dick's Sporting Goods, because they're the big dog now. They were previously second to Sports Authority, but they're actually the largest sports specialty retailer in the space now.
They have $7.3 billion in revenue for the most recent fiscal year, and that gives it about 10%-15% market share for this market. National Sporting Goods Association puts this total market at about $64 billion annually. And recently, the company presented at the Bank of America Merrill Lynch Consumer Retailer Conference in March. And during the presentation, funnily enough, one of the very first slides is titled "Power of Omnichannel." Not surprising at all.
Sean O'Reilly: It's like they stole the slide from Macy's or something. [laughs]
Shen: Keep in mind, the company has had about 39% compound annual growth from 2010 to 2015 for their e-commerce sales.
O'Reilly: So people are going to dickssportinggoods.com and ordering a baseball bat on there.
Shen: So some of the things they're doing well -- in 2010, they had $140 million in online sales, about 3% of their top line. By 2015, it's $748 million, over 10% of their top line. So, obviously, there's that shift in the pie. But also, it's interesting, because he talks about the physical footprint of Dick's Sporting Goods still being a really important piece of their omnichannel strategy. And he says that if they enter a new market or underserved market, a new store opening will usually double e-commerce sales in that region for them.
I guess the main thing they offer now -- before, it may have been expertise, which, some companies still do. For an outdoor goods retailer, REI is really well known, and they've been able to carve out a niche, for customer service, for a lot of the sales associates still having expertise.
O'Reilly: And refusing to open on Black Friday, yeah. [laughs]
Shen: Little things like that. But, in a case like Dick's, where a lot of it's commoditized, it's like, "We want to make sure the consumer can get whatever they want, however they want it, be it picking up in store, ordering online, going to the store and ordering through the store if the stock's not there, and having everything they need lined up to fulfill what the customer wants."
O'Reilly: It definitely seems to me that the industry at large that we're talking about was just a case of there were too many players, and somebody had to go. And the winner, obviously, in this situation, for not the high-end stuff but just the guy who needs a baseball glove for his kid, is Dick's. They're clearly the winner. Out West you have the Big 5 Sporting Goods and all that stuff.
Shen: Which appeals also to the discount market as well.
O'Reilly: For sure.
Shen: So, like I said, they've kind of carved out their niche. Dick's is playing this broader strategy, but they're doing it in a really interesting way. While these other stores are closing a lot of locations, Dick's has been expanding a lot. They opened, I think, 200 locations in the past few years, and I think part of that is expanding that footprint, and the fact that it's helpful for them with shipping to store and using these locations.
O'Reilly: Did you happen to hear what they did with Sears?
Shen: No, I didn't.
O'Reilly: I think it was at a Sears location. This was, like, cobwebs old.
Shen: I think it was in King of Prussia?
O'Reilly: Yeah, King of Prussia Mall. Sears, I guess, partitioned off the second level of a location there, and then they sold a portion of it to Dick's in a long-term lease or whatever. And that's obviously part of Sears' plans to unlock the value of the real estate. But, yeah, it was just interesting to see what they'll do with that, if that's a possibility, because then all the sudden it's like a distribution front retail thing for omnichannel. So, really quick, what did you think of Dick's Sporting Goods' valuation right now? It's at $47; trailing earnings of 280. Does that interest you at all?
Shen: The thing is, it's surprising to me, after reading enough about it, and doing enough research on the industry, you would think the growth opportunity is not that great. But like I said, they've open to 200 new locations over the past few years. Their current footprint is about 650 stores. Management sees the overall long-term potential at about 1,100 locations. The thing is, if you compare them to other big-box retailers, so to speak, like a Best Buy, they are on the smaller end in terms of number of locations. So they do have that runway. And they are really focused on, I think it was, like, e-commerce, driving productivity in those stores. They're bringing their e-commerce operation, for example, in house to have better control over it and to generate some savings there. Overall, a really interesting business.
O'Reilly: Yeah, it definitely seems like they're the current winner.
Shen: The thing is, you either look at it that way, or you look at, maybe not smaller operations -- the stores definitely are smaller -- but, you have a specialized company like Lululemon, or you have a company like REI or Cabela's, where it's going to be focused more on the outdoors, hunting, firearms. Being able to carve out that niche and present that value to the shopper is really important. Otherwise, this is just a very intensely competitive space right now.
Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of and recommends Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.