Yahoo Finance 4 Things to Know When Buying Dicks Sporting Goods Inc. Stock (DKS)
Heavy lies the crown the adage goes for those in control. For Dick's Sporting Goods Inc (ticker: DKS), however, that crown seems highly comfortable, as it becomes the only national sporting goods full-line retailer in the U.S.
When Sports Authority filed for bankruptcy in March, it expected to close between 150 and 450 stores. But by May, it hadn't found a buyer for its remaining stores, which left it deciding to shutter the entire organization. This has given Dick's the top spot as the only national chain.
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As it adjusts to its lone role as the new world order of sports retail, DKS revenues have climbed 7 percent in the first half of 2016, compared to last year. And its stock has moved in opposite of Sports Authority's troubles, jumping 61 percent in 2016.
Sports Authority left some opportunities for DKS. When Sports Authority began selling off its assets, Dick's bought the brand name and other intellectual property for $15 million. This ensures that when people go to Sports Authority websites, they're redirected to Dick's.
It also bought 31 stores from Sports Authority, focusing on areas where the company didn't have a strong presence, including Florida and California. "There is a lot of blank space" after Sports Authority's departure, says Susquehanna analyst Sam Poser.
Dick's can use the opportunity to build its presence in these areas that Sports Authority once controlled.
Dick's accounts for about 11 percent of the overall sporting goods market, according to Morningstar. This leaves it with an opportunity to steal shares from other players. But it still must compete against other large, regional chains, like the privately owned Academy Sports + Outdoors and Modell's, which is popular in the Northeast.
Yet, it still has plenty of room to grow. Now 741 stores, DKS management thinks it can get to 900 stores. The company expects to open 47 new locations, which includes 11 specialty stores, this year. "I would expect that number to increase over the next couple of years," says Poser, as it's also experimenting with smaller store formats, in order to reduce costs.
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Dick's is also looking at potentially purchasing parts of Golfsmith, another sports retailer that filed for bankruptcy in September. This could mean "it's doubling down on a declining industry," says Barclays analyst Matthew McClintock, referring to golf's recent downturn in popularity. But, he added, "It makes sense if it's the right price."
Dick's looks towards customer care to avoid Sports Authority's footsteps. Sports Authority's struggles heightened when they could no longer entice the biggest manufacturers to supply their stores with the latest gear. "Sports Authority didn't invest in their own stores," McClintock says. "Nike ( NKE) wasn't going to give them the best products."
Dick's has tried to prevent a similar trend hitting its stores by investing in the experience. It's increasing its use of employees specifically assigned to the shoe department. This ensures that customers have someone to ask about the kicks, when questions arise, while the salesperson can also point them to the best or more premium options. This keeps Nike and Adidas happy, so they will continue to provide Dick's with the newest shoes.
Dick's tackles the Amazon threat. Amazon.com's ( AMZN) almost otherworldly presence on all things retail means that it's important to wonder how exactly the company will react to the threat of increased online competition. Dick's is secured from Amazon in that it sells premium products. A buyer isn't likely to want to purchase a high-end golf set, without trying it out first in store. And high-end makers won't sell all their products via Amazon.
But Dick's seems to recognize the need for a stronger web presence. Next year, it will take over control of its website internally (it had long been run by a third party). In the meantime, it's growing as a tool for sales. Through 2015, e-commerce as a percentage of net sales increased from 2.8 percent in 2010 to 10.3 percent.
"I don't really worry about the Amazon effect," Poser says. "It's how you manage it."
Valuation remains tricky. It's easy to see how Dick's will benefit from Sports Authority's failure. But it's likely too easy, since it's already "priced into the stock," McClintock says.
In fact, he sees a target price 13.5 percent lower than the current $56.50 mark, based on growth projections once Sports Authority's impact runs its course. And with Dick's currently trading at 15 times its 2017 estimate for earnings per share, McClintock is pricing it closer to 13.7 times. That would put it in line with other sports retailers, like Foot Locker ( FL).
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It's the burden of being No. 1 -- everyone already knows you and already has a piece.
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