Sporting goods retailer Dick's Sporting Goods (NYSE:DKS) just blew through its 52-week high after reporting solid earnings and upping guidance for the year. But how much more gas is left in its tank?
Back in 2004, Dick's announced it was snapping up archrival Galyan's, and since that time, it has worked to integrate the large acquisition. After some initial skepticism and uncertainty, Dick's has posted a couple of strong quarters, and it has recently been increasing earnings guidance. Existing stores are performing well, and same-store sales are chugging along, with Galyan's officially in the mix as of last quarter.
For the third-quarter results released yesterday evening, Dick's blew away earnings estimates, and its sales growth continued a strong upward path. Same-store sales also grew an impressive 8.9%. Better yet, management again increased full-year guidance, this time from $1.84-$1.88 to $1.95-$1.98. Based on the recent stock price of $54.09, that's a forward P/E of about 28.
The 2007 projected P/E is a more reasonable 21 times, but my concern has been that Dick's valuation is high in the rafters. With the stock up nearly 11% today, I'm kicking myself that I didn't buy some shares back in 2000, when the company first went public. But I'm even more worried that the stock price has gotten ahead of itself.
I haven't seen any indication that growth will slow at Dick's, but yesterday's announcement that it is acquiring specialty golf retailer Golf Galaxy (NASDAQ:GGXY) leads me to believe that management is dependent on unpredictable acquisitions to enhance more visible, steady organic growth. Plus, it's hard to tell how much of its solid operating trends are a result of wringing out costs from Galyan's, a benefit which probably won't last much longer.
The sporting-goods space is also very crowded. Wal-Mart (NYSE:WMT) is a major player; the Sports Authority is also out there, though not publicly traded anymore; and Cabela's (NYSE:CAB) and GanderMountain (NASDAQ:GMTN) are furiously building stores to capture the outdoor-enthusiast segment of the market.
Yet here we are, with Dick's having nearly doubled in price over the past year. Since my investment horizon is at least three to five years, I'm not interested in the company; I don't think it will continue to post impressive growth for years on end. It could blaze along for at least another couple of solid years, but the lofty valuation leaves little room for downside surprises.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
