Is It Finally Time to Buy Sports Retail?

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Billionaire David Einhorn didn't explicitly say "yes, now is the time to buy sports retailers." Nonetheless, an industry leader got a big positive last week when Einhorn's Greenlight Capital hedge fund announced it was closing out its short position on this stock. 

Dick's Sporting Goods (NYSE: DKS) is the sports and fitness specialty retailer that offers a range of sporting-goods equipment, apparel and footwear. Dick's also owns Golf Galaxy, a golf specialty retailer.

Einhorn notes that the fear of Internet retail taking market share from Dick's has not come to fruition per his 2Q investor letter...

Dick's saw revenue up 12% in fiscal 2012 (ended January), and analysts expect a 7% rise for fiscal 2014 -- namely driven by the opening of 40 new Dick's stores and remodeling of another 80. As Einhorn mentioned, Dick's reported EPS in the April-ended quarter of $0.48 compared to $0.45 for the same period last year.

But the news wasn't all bad. Gross profit for 1Q was up 4% year-over-year and the gross margin expanded eight basis points to 30.8%. Operating income also increased 2% year-over-year. For full year 2013, the company reaffirmed its EPS guidance of $2.84 to $2.86. 

Analysts still expect the sporting goods company to grow EPS at an annualized 15% over the next five years. Dick's also has a solid balance sheet and cash flow that should still be appealing to investors. The company carries over $100 million in cash and has no debt. 

Top comp

Hibbett Sports (NASDAQ: HIBB) is one of Dick's chief peers, with stores in small- and mid-sized markets primarily in the Southeast, Southwest, Mid-Atlantic and Midwest. Hibbett has 873 stores across 29 states. Hibbett's ultimate goal is to have 1,300 stores across the U.S. in the long term.

Hibbett is looking to open some 75 new stores in fiscal 2014, which should help drive the expected 6% rise in revenue. Hibbett focuses on towns with populations between 25,000 to 75,000, operating more as a "local" sports store. This also gives it a competitive advantage, where many rivals, such as Dick's, tend to avoid these markets. 

Much like Dick's, Hibbett sports a debt-free balance sheet. It had over $100 million in cash as of the end of 1Q. Recent news for Hibbett includes its 2Q EPS of $1.00, below $1.07 consensus estimates. It appears the miss was largely due to a cooler-than-expected spring season. The company is maintaining its fiscal 2014 expectations of EPS between $2.85 and $3.05. 

Niche operator 

Cabela's (NYSE: CAB) is a specialty retailer focusing on fishing, camping and related outdoor activities. The company has 37 retail stores in 24 states and three in Canada. Its stores account for two-thirds of sales, with its direct business (catalogs) and the Internet generating the remainder. 

Analysts expect the company to grow revenue by an impressive 18% in 2013, after being up 11% in 2012. Second-quarter EPS was also robust, coming in at $0.62 versus $0.47 for the same period last year. The big driver of this was 10.5% growth in same-store sales, as sales of firearms/ammo were up noticeably. 

With just 37 stores, its planned opening of six stores in 2013 is a big step for the company's growth. However, don't forget about its multi-channel strategy that doesn't just include retail shoes but also its infamous catalog, which surprisingly is still driving solid returns for the company. In part, because this is something none of the other major retailers offer, it gives Cabela's a differentiation advantage. 

Bottom line

Dicks is trading at 22 times earnings, which is relatively inline with Hibbett (22 times P/E) and Cabela's (24.5 times). With the rebounding economy, consumers should have more income to spend on sporting goods. Although all three of the companies above operate in the same broad "sports retail" industry, the are very different. It would not be unreasonable to say that each is a buy.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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