What Makes This Retailer Different?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you've read anything about retail stocks in the last couple of years, I'm sure you know about show-rooming. For customers, physical retailers are turning into showrooms they use to try out goods, while they then go online to make their purchase. While I know this happens, and I have done it myself, not all industries are affected equally. One retailer that seems to be holding up extremely well is Dick's Sporting Goods (NYSE: DKS).
I've written about this phenomenon before, but the company is proving that their business is different enough to compete effectively with the Amazon.com's (NASDAQ: AMZN) and eBay's of the world. In addition, it's not as though Dick's only faces serious competition from online retailers. The company also has to defend its turf against brick-and-mortar stores like Walmart (NYSE: WMT) and FootLocker (NYSE: FL) as well.
Walmart wants to be the retailer that everyone shops at, and sporting goods and equipment is standard in every Walmart store. FootLocker operates smaller stores that are more focused on shoes and clothing, compared to the many types of equipment that Dick's offers. There are key elements to why Dick's is so successful. However, before we get to that, let me walk you quickly through the company's last quarterly earnings just to get an idea of how well Dick's is performing.
The company reported revenue up 11.2% and EPS increased 25%. For any retailer in today's economy, these are impressive figures. Possibly even more impressive are Dick's same-store sales, which increased by 5.1%, and eCommerce sales, which were up 36.7%. Considering that Amazon seems to be disrupting every other retailer, how was Dick's able to increase sales not only in store, but online as well?
There are at least three reasons that Dick's seems to be insulated from Amazon or other retailers stealing their business. First, Dick's knows that sometimes it makes more sense to stock the right selection rather than just more. As a quick example, if you look at Dick's web site and search for Under Armour clothing for men, you are presented with 356 choices. With 24 items per page this works out to roughly 15 pages of selections. On Amazon, using this same search you get 1,745 results with 24 per page. To see each item on Amazon means looking at nearly 73 pages. Dick's understands that customers want good choices, but they don't want to be overwhelmed.
The second competitive advantage Dick's possesses is that their business lines are geared to items that customers like to feel, touch, and most importantly try on. My wife has her black belt in shopping, but in most cases she prefers to try on clothing and shoes before buying them. In addition, just because she wears one size in a particular brand, doesn't mean the same size in another brand will fit the same.
It's tough for Amazon to match Dick's or FootLocker's inherent advantage of having multiple sizes in stock that can be tried on one after the other. It might be slightly cheaper to buy shoes or clothes from Amazon. However, it's a pain to go through trying on different sizes, go home, place your order, and wait for a few days to actually get the item. For many people, if it requires effort to find the right item, they would rather buy it and be able to take it home.
Another reason Dick's seems insulated from online competition is their selection when it comes to team sports, and in particular kid's sports. Let's pretend that you have a child starting baseball for the first time. They need cleats, a bat, and a glove. Are you likely to take the child shopping so they can try on their glove, check out the different bats, and make sure the cleats fit? If your other option is to order all of this online you are likely to have to deal with returns, because something won't “feel right” or won't fit. Similar to clothing purchases, if it requires effort to get the right selection, customers will likely buy it in the store.
These are just a few of the competitive advantages that Dick's holds over their competitors. Dick's offers a good selection that is still manageable. The company doesn't have to compete with companies like Amazon and Walmart for margin killing electronics. They don't have to fight off competition by making sure their products are cheaper. While they do have to compete with places like FootLocker for shoes and clothing, FootLocker can't match Dick's overall selection.
In the final analysis, Dick's succeeds because they sell things that are harder to pick out and require effort. On a relative basis, Dick's stock seems reasonably valued as well. Analysts expect earnings growth of nearly 15% in the next five years, which easily bests Walmart at 9.2% and FootLocker at 12.13%. While Amazon is expected to grow much faster at over 32%, Dick's sells for a P/E ratio nearly equal to its growth rate, while Amazon sells for a P/E that is approaching 5 times its growth rate.
Dick's doesn't pay as good of a dividend compared to Walmart or FootLocker at just over 1%, but the company's faster growth rate more than makes up for this.
When you add it all up, you have a retailer that is different from the rest, posting impressive growth, and has a business insulated from online competitors. "Every season starts at Dick's," and investors should start their investigation into this company by adding DKS to your personalized Watchlist today.
MHenage has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Dick's Sporting Goods. 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!