Sporting Goods And Two Long-Term Trends

By Chad Henage - September 6, 2012 | Tickers: AMZN, DKS, FL, NKE, UA | 0 Comments

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There are probably several retailers that wish that they could become sporting goods stores at this point. This is one area of retail that seems insulated from the competition of online retailers such as Amazon.com (NASDAQ: AMZN). In particular, Dick's Sporting Goods (NYSE: DKS), has been a consistent performer even in the face of online competition. With the company's most recent earnings report, Dick's proved again the strength of a physical presence in this type of retail.

You Can't Touch Products Online:

While other retailers struggle with the concept of show rooming, that customers window shop at physical retailers and then go online to make their purchases, sporting goods stores have several unique advantages. One of the big differences between shopping at a store like Dick's or Foot Locker (NYSE: FL), has to do with the product selection. In other parts of retail, a larger selection is the reason that customers choose to shop online versus in person. You would think that this would play out in the sporting goods arena as well, but at this point customers are choosing to see, touch, and try out the products rather than buying them online. A good example would be a child looking to purchase baseball equipment. It makes much more sense for the child to try out their new glove, clothing, and cleats, than to order all of this online and take the chance that it doesn't fit well or feel right. The same dynamic also plays out in the company's shoe department as customers want to try on, and feel how the shoe fits before making a purchase. This is a case where even a larger selection may not make a difference.

Until Virtual Shoe Fittings Are Reality, They Sell Better In Person:

Just as an example, Amazon currently lists over 6,700 different options of Nike (NYSE: NKE) footwear. By comparison, Dick's currently has 786 options available on their website. You would think with over eight times the selection, that customers would choose Amazon by an overwhelming amount. However, shoes are a category of retail where many customers prefer to try them on before making a purchase. This trend towards higher-end selections seems to be a permanent shift for at least two of the larger shoe manufacturers. Dick's carries multiple brands of shoes, but two of their important brands are Nike and Under Armour (NYSE: UA). Looking at the Dick's website, over 40% of the Under Armour shoe selection is priced at $80 or more, and over 50% of their Nike shoes priced at least $80. This higher average price point has been driven by consumer demand for higher performance options, and benefits both the shoe company and the physical retailer. Generally speaking, customers who are buying higher priced merchandise don't want to have to worry about possible returns. You can see these dynamics playing out by looking at Dick's recent quarterly results.

Earnings:
Dick's reported overall sales up 10%, driven by a 6.2% gain from new store sales and an increase of 3.8% in same-store sales. This strong sales performance along with cost controls allowed the company to increase earnings per share by 25%. The company's financials were equally impressive as the company increased its gross profit margin from 30.69% last year to over 31% this year. Investors looking for the company to increase its dividend in the future should be happy to know that the companies free cash flow payout ratio currently is just 41%. In addition, Dick's forward guidance indicates that these strong sales trends should continue.

Outlook:
The company is calling for same-store sales to increase 4% to 5% the remainder of the year. Dick's also expects to open a total of 38 new stores in 2012. With contributions from both higher same-store sales and new stores, the company expects non-GAAP earnings per share of between $2.47 and $2.51. While this guidance is slightly below analysts’ current expectations, at worst it represents a greater than 22% growth rate on a year-over-year basis. In addition, the company is acquiring the popular Field & Stream trademark in the hunting, fishing, camping, and paddle categories. Dick's expects that this purchase will allow the company to leverage the value of this popular brand to better results. Given these positive results and analysts’ strong expectations for growth in the future, the stock could be attractive to long-term investors.

Conclusion:
You can see from the expected growth rates of multiple companies in the sporting goods industry, that analysts see good things in the future. Dick's primary competitor is Foot Locker, which is expected to grow earnings at nearly 15% in the next few years. Under Armour, and its growing stable of clothing and footwear, is expected to post growth of nearly 24%. Even the much larger Nike is expected to grow earnings per share at about 8% over the next few years. What this tells me is, shoes are likely to continue to be a growth category for Dick's for the next several years. With less than 500 Dick's stores and just 81 Golf Galaxy locations, you can see that the company has plenty of room to grow in the domestic market. Dick's is priced a little more expensively than Foot Locker. However, the company is still in its organic growth phase, versus Foot Locker is more established and has to take market share and cut costs to continue their growth. Investors should consider these longer-term trends in sporting goods, and add Dick's to their Watchlist to keep up with developments.

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