Five years from today when investors look back in time they will likely mark 2013 as a catalyst year for Dick's Sporting Goods (DKS). With active/healthy lifestyles becoming a growing trend in this country, Dick's is positioning itself to capture a large piece of consumer's discretionary income. Last year the company had over $5.8 billion in sales giving it roughly 9% of the U.S. retail sporting goods industry (source: First Research). The next five largest competitors combined, which include Foot Locker (FL), The Sports Authority, and Cabela's (CAB), were roughly 20% of the market.
Dick's Sporting Goods may not be a household name quite yet, but as the company continues expanding you may see one in your local strip mall very soon. The company currently operates 518 locations and recently increased its projection to 1,100+ stores compared to an initial estimate of 900. During 2013 the company is projecting to open 40 new Dick's Sporting Goods locations.
Source: Dick's Sporting Goods SEC Filings
Throughout this article we will look at Dick's upcoming fiscal year, which is focused upon major capital expenditures to fuel future growth. The company is still in the early innings of its growth story and it may prove wise for investors to begin further research on this stock.
The company announced during the recent quarterly earnings report that capital expenditures would double from the prior year to roughly $299 million on a net basis. Although this is a substantial amount of spending, the company has more than enough operating cash flow to fund these costs (In FY2012 cash flow from operations was $438 million). Spending will be multi-faceted, improving the company's online and mobile presence, remodeling existing stores, opening stores in smaller markets, and launching newly branded stores.
Mobile and online shopping is a tremendous opportunity for the company in the years ahead. Forrester research estimates the online U.S. sporting goods market is approximately $5 billion and expected to grow 10-15% annually through 2016. Online sales were roughly 5% of Dick's total sales in FY2012 and grew 50% year over year (see chart below). The company believes it can at least triple the size of its eCommerce business by 2015.
Source: Dick's Sporting Goods Investor Presentations
Dick's has a unique shopping experience, which differentiates it from other sporting goods retailers. It has created "shops within shops" to showcase the top-selling brands like Nike (NKE), Under Armour (UA) and The North Face (VFC). Not only do these specialty sections of the store sell higher-margins products, but they also offer exclusive merchandise (various colors and patterns) that other retailers don't have access to. These "shops within shops" are one of the many opportunities that could result in increased sales and traffic for Dick's. The company plans to remodel numerous existing stores to include these shops.
The company has performed research in smaller markets utilizing less square footage and found the results to be worth pursuing. This new idea was the reason for another 200 stores to be added to management's estimate of capacity in the United States. We are likely to see a higher ROI and higher margins on these locations due to lower fixed costs. One benefit of moving into smaller markets is to reduce the costs of shipping goods to customers. If a Dick's location is closer to the customer, they are more likely to order online and go to a store to pick up a good, thus offering the potential for an add-on sale.
Last year the company developed a new concept running store called "True Runner." The test was successful and Dick's plans to open two more locations in 2013. Additionally the company purchased the naming rights to Field & Stream last year. It plans on opening two Field & Stream stores in 2013, direct completion with Cabella's, Bass Pro Shops, and Gander Mountain. Depending on the success of these new brands in 2013, it will likely dictate how the company allocates capital moving forward.
While some investors may be spooked by such a large increase in CapEx spending, CEO Edward Stack outlined the company's rationale during the recent quarterly earnings call:
But we're really taking a look and making these investments for the long-term benefit of the company and not just trying to manage the business quarter-to-quarter, and I know that that's difficult. A lot of people really articulate that, that's the way a business should be run, until you run it that way and then it's -- there's some pain associated with it. But we feel that these are absolutely the right things to do for the company going forward.
My Thoughts on the Future
Management gave guidance for the upcoming quarter and fiscal year. Below are some relevant points I factor into my estimates:
- Revenue growth of 9% in FY13. Management is estimating 2-3% increase in same-store sales.
- No change in gross margins. Due to increased capital expenses (higher depreciation charges) management is projecting no change in gross margins and a -$0.12 impact to EPS from growth investments.
- Modest operating margin improvement. Lower percentage of SG&A costs and slightly higher pre-opening expenses.
- Lower interest expense versus prior years (The company purchased its corporate headquarters building in 2012 which reduced interest expense).
- Diluted share count of 126,000,000 - provided by management
- Management is projecting FY13 diluted EPS of $2.84 - $2.86 per share. My estimates are slightly lower.
Please note that the estimates below are not guaranteeing any of the results will be met. These estimates are strictly based upon management's guidance, the company's SEC filings, press releases, historical data, and my estimates.
Full Year Estimate
Full Year Estimate
Cost of Revenue
Selling, General and Admin Exp
Provision for income taxes
Basic Shares Outstanding
Diluted Shares Outstanding
Source: Dick's Sporting Goods SEC Filings, Dick's Sporting Goods Management Guidance, and my estimates based upon historical data and future expectations. Estimates given above are no guarantee of future results, please evaluate the company in greater detail before making investment decisions.
Shares of Dick's Sporting Goods currently trade at 20.5x trailing twelve month earnings, roughly in line with the historic average. The recent pullback in share price has brought shares back to this average and may offer a good entry point for new investors. Assuming the company delivers upon its estimates and continues to grow earnings per share at a double-digit rate, the market is likely to award shares with a higher P/E multiple.
Source: Dick's Sporting Goods SEC Filings
Assuming we use my estimate of $2.81 per diluted share (slightly more conservative than management's guidance), if the stock traded at 20x trailing twelve month earnings, then at this same time next year shares would be worth roughly $56.20, 18% higher than current levels. An even more conservative estimate of 19x TTM earnings would result in a share price of $53.40, roughly 12% above current levels. Note that neither of my assumptions factor in the quarterly dividend payment.
The company initiated a share repurchase plan in 2011 and added to it in 2012. Last year Dick's Sporting Goods repurchased 4.1 million shares. During the recent earnings announcement Dick's announced a new five-year $1 billion share repurchase program. Given that a large amount of 10-year stock options are set to expire in 2013 these combined programs are anticipated to, at a minimum, offset any dilution.
As investment spending ramps up this year many investors may remain cautious on the stock. If investors are hesitant I would point them to the healthy balance sheet, high cash flow generation, and long-term goals of the company. In a recent Bank of America/Merrill Lynch conference the company reiterated its long-term goals. "First, to reach double-digit operating profit margin. Second, to triple the 2011 size of our eCommerce business by 2015. Third, over time, to grow our new store base to 1,100 new stores. And fourth, to grow our private brand and private label business to $1 billion in sales by 2017." More clarity will be given as the company also announced it will hold its first investors day in September.
Consider your investment goals and objectives before initiating a position in Dick's Sporting Goods and please remember that the value of investments in equity securities, like DKS, will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Since I attempt to tailor my estimates above conservatively, any upside surprises would be beneficial. Given current valuations and growth opportunities, in my opinion shares offer an attractive entry point.