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DKS AT A GLANCE

P/E ► -50.8   EV/EBITDA ► 24.4 HIGH ROA ► -1.8% AVG ROE ► -4.9% AVG Debt to Equity ► 1.14 AVG Current Ratio ► 1.45 LOW Interest Coverage Ratio ► 0.260 AVG

 

 

 

 

 

 

Dick's Sporting Goods (NYSE: DKS) is the nation's leading specialty sporting goods retailer. Dick's operates 384 namesake stores across 39 states which sell a wide range of sporting equipment and apparel, in addition to 89 Golf Galaxy stores and 14 Chick's Sporting Goods stores.^[1] In 2008, Dick's generated $4.1 billion in total sales, a 6% increase from 2007,^[2] ranking it as the second largest sporting goods retailer in the U.S.^[3] Dick's started a major push in 2007 to expand beyond the Northeast and Mid-Atlantic regions where it operates by targeting temperate climate regions such as Atlanta, Florida, and Texas. In 2007, the company made a significant push into California by acquiring Southern California-based Chick's Sporting Goods, a 15 store retail chain similar to Dick's, and Golf Galaxy, a specialty golf leader which operates in 31 states.^[4] By increasing its presence in these areas, the company hopes to temper the declining sales during the winter (most of its products are directed at outdoor, warm-weather sports).

While the majority of Dick's products are brand names manufacturers like Nike, adidas, and Under Armour (UA), one important trend affecting Dick's is the growth of its own private label product lines, which the company aims to account for about 15% of total sales.^[5] In addition, as one of the largest specialty retailers in the U.S., Dick's is particularly prone to downturns in the economy that can constrain consumer spending on non-essential goods like sporting goods equipment.

2009 Q2 Financial Results

In the quarter ending August 1, 2009, Dick's reported net income of $42.4 million ($0.36 per share), exceeding average analyst estimates of $0.28 to $0.31 per share. In Q2 2008, the company delivered slightly higher revenue at $44.3 million. Net sales for the second quarter of 2009 increased by 3.7% to $1.1 billion due to the opening of new stores and positive effects from e-commerce sales, offset by a 4.1% decline in same-store sales. ^[6]

Business Financials

As a sporting goods retailer, Dick's generates revenue through sales of sporting equipment and apparel in its physical Dick's Sporting Goods retail stores and DicksSportingGoods.com (Dick's e-commerce site fully outsourced to GSI Commerce (GSIC)). The company also owns the Golf Galaxy retail chain which sells golf equipment and apparel and provides club repair and other services.

Dick's generated total revenue of $4.1 billion in 2008,^[2] with 92% of sales coming from Dick's Sporting Goods stores and the remainder from Golf Galaxy stores, which it acquired in February 2007. ^[7]

In 2008, sales at Dick's Sporting Goods stores were split between three major product categories ^[8]:

• Sports equipment: 54%
• Apparel: 30%
• Footwear: 16%

Dick's total sales has grown considerably in conjunction with store growth, from $1.2 billion in 2002 with 141 stores to $4.1 billion in 2008 ^[2] from its 487 Dick's, Chick's, and Golf Galaxy store locations.^[9] Dick's profit margins are roughly comparable to other sports retailers, with net profit registering at 3.45% for Q2 2009 ^[10] compared to 0.42% for its industry ^[11]. In most Dick's stores, approximately 82% of floor space is used for sales and 18% is used for backroom storage of merchandise, receiving area, and office space. ^[9]

Trends and Forces

Expanding Store Base to Warmer Climates

At the end of 2006, Dick's operated 487 stores in 34 states, concentrated the Mid-Atlantic/Northeast regions. The company has initiated plans to open stores in regions with year-round warm climate such as Florida, Texas and California where outdoor sports like golf, baseball and football are played all year. In 2008, the company added 44 and 10 new Dick's and Golf Galaxy stores, respectively, and closed one Chick's store.^[9]

Dick's made a big move into California in November 2007, acquiring Chick's Sporting Goods. Chick's is a sporting goods specialty retailer much like Dick's, with 15 stores located throughout Southern California, carrying a full line of team sports gear as well as equipment for alternative sports like surfing and snowboarding.^[12]

Private-Label Helping Margins

In order to boost margins, Dick's carries its own private-label brands (including Ativa) alongside its brand name merchandise from companies like Nike (NKE), Under Armour (UA) and brands like The North Face from V.F. (VFC). Its private-label products sell at margins approximately 5-6 percentage points higher than typical branded goods. Dick's has put an increased emphasis on these private-label brands as they have grown as a percentage of total sales from 5.8% in 2002 to 14.1% in 2006.^[13] As Dick's moves private-label products into Golf Galaxy stores and increases the presence of these brands in Dick's stores it should help the company continue to increase their gross profits. As of 2009, the company's management decided not to release figures on private label performance, but stated that it is "relatively similar" to what it was in the past. ^[14]

Seasonality

Seasonality affects Dick's sporting goods in two distinct manners:

• As a retailer, Dick's typically experiences greater sales during the fourth quarter holiday season. Thus, a stronger or weaker than normal holiday season can considerably help or hurt Dick's.
• Because many of Dick's products are used in warm weather, outdoor activities (baseball, running, golf, etc.) sales can slump during the winter seasons. Dick's counters this in part by carrying winter apparel and sporting equipment (such as skiing and snowboarding equipment). This type of seasonality could be minimized if Dick's can successfully enter markets in Florida, Texas and Southern California where warm temperatures remain year-round.

Macroeconomic Downturns: Squeezing Consumer's Wallets

As a retailer of non-necessary goods Dick's is one of the first companies to lose sales when poor economic conditions dampen consumer spending. Since Dick's product lines are not diversified with non-athletic offerings (e.g., groceries or basic clothing) it is more exposed to economic downturns than other retailers such as Wal-Mart Stores (WMT) and Target (TGT). Dick's struggled with the economy's downturn in 2008 as sales on net increased 11%, but in 2009 has maintained positive net income with the opening of new stores and the addition of eCommerce sales.^[14] However, this growth was partially offset by comparable store sales declines of 3.2% and 11.1% at Dick's stores and Golf Galaxy stores, respectively during Q2 2009. ^[14]

Competition

Dick's the largest sports retailer retailers in the U.S. by revenue selling $4.1 billion of sporting goods in 2008.^[2] Dick's competes in fragmented industry, with the top six sporting goods retailers holding only 19% of the estimated $52 billion market. The Sports Authority (bought by a private equity firm in 2006) holds second place with $2.98 billion of sales in 2008.

Other companies that Dick's compete with in the sporting goods retail market include the following firms:

• Academy Sports & Outdoors: Academy is a private company operating just under 100 stores throughout the South and Southwest regions of the U.S. Academy's product offerings focus on apparel and equipment for outdoor activities such as camping, hunting, fishing and boating.
• Recreational Equipment, Inc. (REI): REI is a privately-owned co-op that operates about 90 stores heavily concentrated in the Western half of the US. REI sells mostly apparel and equipment used for hiking, climbing, kayaking and other similar outdoor activities.
• Big 5 Sporting Goods (BGFV): This small-store neighborhood style retailer leads the sporting goods market in Western states such as Washington, California and Arizona. If (or when) Dick's begins to make moves into the Pacific states, Big 5 Sporting Goods (BGFV) will be their main competition as Big 5 operates over 300 stores throughout the Western region.
• Hibbett Sports (HIBB): Hibbet boasts over 600 small-format stores based primarily in the Southeast region of the US. These stores are traditionally located in indoor and strip malls and sell a variety of sporting equipment and apparel.

Dick's also faces considerable competition from footwear retailers like Foot Locker ($5.24 billion in 2008 sales)^[16] and Finish Line (FINL) ($1.26 billion)^[17] as footwear accounted for 16% of Dick's total revenue in 2008.^[18] Dick's is also facing increasing competition from big box discount retailers like Wal-Mart, Target and Amazon.com who sell a selection of sporting equipment and apparel in their stores as well.

^{[19][20][21] [22]}

Sporting Goods Market Share

On a head-to-head basis it is hard to compare Dick's with its main rival, privately owned Sports Authority because of a lack of public information on the company's business performance. However, Sports Authority generated an estimated $2.98 billion of sales^[23] from over 450 stores in 2008 ^[24], compared with Dick's $4.1 billion from 487 stores.

References

1. ↑ Dick's Annual Report 2008, page 1
2. ↑ ^{2.0 2.1 2.2 2.3} Dick's Annual Report 2008, page 24
3. ↑ Internet Retail "Dick`s Sporting Goods selects Global Sports to operate its web business"
4. ↑ Dick's 2008 Annual Report, page 22
5. ↑ Kevin Stecyk, Seeking Alpha, "Dick's Steers Clear of Housing Weakness"
6. ↑ Dick's 2009 Q2 earnings
7. ↑ DKS 2008 10-K, Item 1 "Business," page 4
8. ↑ DKS 10-K 2008, Item 1 "Business," page 6
9. ↑ ^{9.0 9.1 9.2} DKS 10-K 2008, Item 1 "Business," page 7
10. ↑ Google Finance DKS
11. ↑ Reuters DKS Key Ratios
12. ↑ "Dick's Sporting Goods 3Q profit drops 40 percent" 11/20/2008 Forbes.com
13. ↑ Dick's Sporting Goods (DKS) Annual Report, Fiscal Year 2007, "Private Label Sales", p. 23
14. ↑ ^{14.0 14.1 14.2} Dicks Sporting Goods, Inc. Q2 2009 Earnings Call Transcript
15. ↑ Dick's Sporting Goods (DKS) Annual Report, Fiscal Year 2007, "Private Label Sales", p. 23
16. ↑ Google Finance FL
17. ↑ Google Finance FINL Financials
18. ↑
19. ↑ HIBB 2007 10K, Item 6:Selected Consolidated Financial Data, pg. 18
20. ↑ DKS 2007 10k, Item 6:Selected Consolidated Financial and Other Data, pg. 24
21. ↑ SPCHB 2007 10k, Item 6:Selected Financial Data, pg. 17
22. ↑ Google Finance, HIBB, SPCHA, DKS, BGFV
23. ↑ Hoovers Sports Authority Financials
24. ↑ Mahalo Sports Authority
25. ↑ DKS 2007 10k, Item 6:Selected Consolidated Financial and Other Data, pg. 24
26. ↑ Hoovers:The Sports Authority Information
27. ↑ Hoovers:Academy Sports & Outdoors Information
28. ↑ Hoovers:REI Information
29. ↑ BGFV 2007 10k, Item 6:Selected Financial Data, pg. 19
30. ↑ Hoovers:Hibbett Sports Information