Showrooming and Sporting Goods
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There has been a lot made of the concept of showrooming. If you aren't familiar, showrooming is a new term where a customer shops for something in person at a retailer, and then goes online to make the purchase. This phenomenon has propelled companies like Amazon.com (NASDAQ: AMZN) to new heights in the stock market. As Amazon grows, the company is in theory hurting traditional brick and mortar retailers like Walmart and Target. One retailer that seems to be holding up pretty well against this threat is Dick's Sporting Goods (NYSE: DKS).
Proponents of showrooming would suggest that this is the way of the economy, and consumers will continue to buy more and more online. The broader selection and in theory cheaper prices will drive this behavior. However, Dick's is seeing very good growth in spite of this threat. For instance, in the last two years, Dick's has shown between 7-10% revenue growth, and analysts expect more of the same in the next two years. Net income growth has been phenomenal, increasing by over 34% and 44% in the last two years. In this same time, look at Dick's gross margin:
As you can see, not only is Dick's not suffering margin contraction, but margins have actually increased for the last three years in a row. With analysts calling for over 15% EPS growth going forward, what is Dick's doing that allows the company to compete so successfully with online retailers like Amazon?
First, Dick's is in an industry that just isn't being disrupted by online sales like others. The reasons are fit and function. What I mean by fit is, people buying athletic clothing such as shoes, tops, shorts, and the like are much more interested in trying on the item. When it comes to shoes in particular, customers want to make sure the shoe fits before they buy. This is the difference between selling sporting goods and electronics. If you buy a 40” television of the same make and model from Amazon or Best Buy, you are all but assured the same item. The item's performance is going to be identical, and in theory it might be cheaper from Amazon. The selection online is certainly more robust, and if the price is cheaper, why not? Luckily for Dick's, buying shoes isn't like buying a television. Let me give you a specific example and we'll see how the company competes.
Let's say that you are a runner, and you've seen these Nike Air Max+ 2012 shoes that you just have to buy. They aren't cheap with a retail price of $169.99, but you run a lot and you've heard these shoes will bring you comfort and performance. You decide to go online to see if Amazon sells them. In your size 10 they are...wait a minute...$169.99? How can that be? Amazon is an online retailer, shouldn't they be cheaper? You do notice that if you happen to wear an 11 that they are $159.99. While that's strange, you decide to go try them on to make sure what size you need. You drive to your local Dick's and they have them in stock for $169.99. You ask for a pair of 10s and try them on, they are little snug. You decide to try the 11s, and they fit perfectly. Now in the back of your head you know you can buy these through Amazon and save $10, but what do you do? You buy them at Dick's because you want to go for a run today in them. The fact that you've already spent gas money and your time to get to Dick's, just doesn't make the $10 savings worth it.
Now I know this might not play out exactly this way every time, but in theory this is one reason Dick's can compete. The customer has already used gas to get to the store, they have already tried on the item, and the $10 savings is just not significant enough to prompt an online purchase. For showrooming to work, the price has to be significantly different. This is why though Amazon carries over 7,000 types of running shoes versus Dick's 252 styles, yet Dick's is able to compete.
Granted this is just one example, but Dick's improving gross margins bear out the point. Shoes are one thing, but this same principal applies to bats, gloves, soccer balls, baseballs, etc. While there might be a price difference online, you can't try out these items on a computer screen. If I have a kid in little league and I need a bat, ball, glove, and cleats, I'm going to a store where he or she can try on the cleats, and we'll pick up the rest there too. While Amazon does a lot of things well, there seems to be a strong demand for niche retailers. As we move into spring, summer, and fall, many customers seem to be saying, “Every Season Starts At Dick's”.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Dick's Sporting Goods. Motley Fool newsletter services recommend Amazon.com. 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.If you have questions about this post or the Fool’s blog network, click here for information.