An Excellent Specialty Retailer for Your Portfolio

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Winters tend to hinder productivity. And when holidays start feeling dull with all that laziness and idleness, winter sports are the best substitute for a healthy outdoor activity during the daytime. Likewise, indoor games (darts, table tennis, foosball) serve as quality family time during the cold winter evenings. One company that efficiently caters to the sporting market segment all year round is Dick's Sporting Goods (NYSE: DKS), a speciality retailer that not only offers a wide range of indoor and outdoor sporting goods and related equipment, but also athletic and sports apparel and footwear to complement your sports goods purchases.

The retailer carries merchandise from Callaway Golf and famous athletic brands like Nike, Under Armour, Reebok and Deckers Outdoor, amongst others. Dick's also provides repair, gripping, tuning and custom fitting facilities for most of the sports gear. The company's stores hold bigger square footage than most of its competitors and are subdivided into smaller booth-like shops that sort out products based on brands, allowing walk-in customers to have easier access to what they're looking for.

With over 490 brick-and-mortar stores country-wide, the company is gradually expanding across the US. Dick's opened 21 stores during the third quarter this year, and has also already opened the 7 stores it projected to open in the fourth quarter. In the next 5 years, Dick's management intends to open 400 new stores bringing its total store count to approximately 900.

Because of the company's wider focus across two different business segments--sporting goods and apparel, it faces competition from players in both segments. Big 5 Sporting Goods (NASDAQ: BGFV), a small cap company, is the closest in comparison because much like Dick's, Big 5 also caters to both of these segments. Cabela's (NYSE: CAB) is a larger cap company like Dick's, but serves a narrower sporting goods market. Hibbett (NASDAQ: HIBB) and Foot Locker (NYSE: FL) compete with Dick's in the sports wear segment. 

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DKS Revenue Quarterly YoY Growth data by YCharts

Competition may be fierce, however a quick look at its year-over-year growth trend of quarterly revenues reassures that, competitively, it is doing just fine. The specialty retailer also boasts a healthy stream of free cash flows. With a minimal debt load on its balance sheet and a debt to equity ratio of merely 0.013, Dick's is one of the most solvent amongst its peers. ROA of 9.09% and ROE of 16.78% are the third best, after Hibbett and Foot Locker.

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DKS Free Cash Flow TTM data by YCharts

With $294.5 million in cash, second only to Foot Locker, the company is also in a good position to maintain its dividend payout. Last year, the company initiated its first dividend of $0.50 per share, but this year decided to cut it down to a more feasible $0.125/share. The company also announced a special dividend of $2 per share this quarter, following suit of Costco, Limited Brands and dozens of other corporations that fear tax hikes in the coming year or want to benefit from record low interest rates. Dick's currently sports a 1% dividend yield.

A good thing about Dick's is the convenience of online purchases it provides on its website with low or no shipping charges and quick order-filling. For the holiday season, Dick's has set a $20 minimum purchase bar for customers to avail free shipping on sporting goods while close competitor Cabela's sets it at $99. With the growing strength of its ecommerce revenues, Dick's is now also emerging as a competitor to Amazon. Although, in the latest quarter, revenue generated through online sales contributed only 4% to total revenues, but it was about a 47% increase from the same quarter last year.

ECommerce is expected to play a significant part in its revenue growth as management forecasts the ecommerce business to triple within the next five years. The fact that famous brands like Nike, Under Armour and Deckers don't sell directly to Amazon will help Dick's maintain an edge over Amazon in getting premium products directly from the manufacturers. Margins for online sales are usually higher than in-store sales. Because of high SG&A expenses, Dick's current gross and net profit margins are on the lower end which is why a transition towards ecommerce will help boost margins to an extent.

Going forward, Dick's expects to earn an EPS of $1.03-$1.05 in Q4, guided upwards from an earlier estimate of 1.01-$1.05. Same-store sales growth is expected to reach 4%, compared to only 0.9% during the same period last year. The company has a track record of either beating or coming in line with analyst earnings forecasts in all of the last eight quarters. The consensus mean EPS estimate for the full fiscal year 2013 is now set at $2.56. A forward P/E of 19.81 gives the stock a fair price of $50.71.

Dick's has achieved an over 68% return in the last five years and a year-to-date return of about 41%, excluding dividends. DKS is pretty much fairly valued at the moment, but consider adding this stock to your watchlist. Wait for a dip for a profitable long position in the stock.

PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of 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!

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