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Summary

  • Dick's has been able to grow revenue and expand their margins across the board.
  • Aggressive expansion signals significant demand for outdoor recreational products.
  • Dick's commitment to share buybacks and dividends enhances an already good value.
  • Slight headwinds from hunting segment shouldn't affect revenue growth.

Solid Financial Performance Show Signs Of Slowing

Since 2009, Dick's Sporting Goods (NYSE:DKS) has been able to grow revenue, operating, and net income by a CAGR of 12.4%, 24.2%, and 25.7%, respectively. This impressive revenue growth has coincided with rapid margin expansion.

Margins20092010201120122013
Gross27.6%29.7%30.6%31.5%31.3%
Operating5.1%6.3%8.3%9.0%8.6%
Net3.1%3.7%5.1%5.0%5.4%

As shown above, management was able to significantly increase gross, operating, and net margins. Although revenue growth has been impressive, revenue growth has started to slow. In 2013, revenue grew 6.5% which was down from 12% in 2012. Dick's slowing revenue growth can partially be attributed to slowing same store sales growth.

Growth Rate20092010201120122013
Comparable Sales-1.4%7.2%2.0%4.3%1.9%

In Q1 2014, comparable sales growth continued to decline to 1.5%. However, net sales were up 8% in the quarter due to the rising number of stores. Management's business plan is to focus on rapidly expanding their retail network while maintaining low compare sales growth.

Rapid Growth Plans

Dick's Sporting Goods specializes in outdoor recreation. This area of the economy has been an area of strong consumer demand, especially during the recession. According to the Outdoor Industry Association, outdoor recreation spending grew at a CAGR of 5% from 2005-2011. Recreation spending was over $646 billion a year during the period. For some perspective, the U.S. grocery industry's sales were $620 billion in 2013, according to Food Marketing Institute. Over the last decade, outdoor recreation spending has been a model of consistent consumer spending. This makes estimating future retail demand more predictable than other discretionary segments.

Dick's Sporting Goods management estimates there is plenty of consumer demand. As a result, management is continuing to open more retail stores, while other retailers continue reducing their retail footprint. In 2013, Dick's opened 44 new stores and closed only 3. This represents a growth of over 6% in 2013. The rapid expansion plan has continued into 2014. In Q1 2014, Management has already opened 8 new stores. Dick's Sporting Goods isn't solely focused on store expansion. Capital expenditures are set to increase 26% from 2013 levels. Management is investing heavily to improve their e-commerce business.

Currently, Dick's has revenue of over $6 billion. In 2013, their e-commerce business represented around 8% of sales or $496 million. Management is expecting to be able to double their e-commerce revenue by 2017. According to Retail Info System News, management expects online revenue to reach $1 billion.

Dick's Sporting Goods comparable sales growth has slowed. However, management's aggressive store expansion plan, along with progress in e-commerce sales, should continue their impressive revenue growth.

Relatively Cheap

Dick's Sporting Goods is trading cheaper than their peers.

ValuationCabela's Inc. (CAB)Dick's Sporting GoodsHibbett Sports, Inc. (HIBB)
P/E(ttm)21.816.719.5
P/S(ttm)1.30.91.6
EV/EBITDA(ttm)18.17.89.9
ROA(ttm)3.311.317.6
ROE(ttm)13.120.724.8
Dividend YieldN/A1.1%N/A

As can be seen above, Dick's Sporting Goods is trading at a much lower valuation based on P/E, P/S, and EV/EBITDA than Cabela's and Hibbett Sports. Dick's Sporting Goods has a high ROE and even has a respectable 1.1% dividend yield.

Currently, the shares offer a compelling buying opportunity in a relatively pricey retail environment. The value of Dick's shares is made even better by management's steadfast commitment to increasing shareholder value.

During 2013, the company paid $64 million in dividends, a payout ratio of 18%, and repurchased $255 million in shares. This should continue because management has the authorization to purchase an additional $745 million worth of shares.

Small Issue Ahead

Over the last several years, the United States gun market has experienced a massive increase in demand. The rapid increase in demand has resulted in a temporary shortage. This greatly benefited gun retailers because their inventory was being bought out rapidly. However, the elevated demand for guns and ammunition has appeared to have peaked in 2013. The rapid rise and fall of gun demand has resulted in significant variability for certain retailers. In Q1 2014, Cabela's experienced a comparable sales decline of 21.7%. The majority of the decline was due to the falling demand for guns and ammunition. Although not as dependent, Dick's Sporting Goods does generate a sizeable portion of their revenue from hunting. This has helped increase revenue growth and could help slow it down.

On the Q1 2014 conference call, Ed Stack, CEO, talked about gun and ammunition softness: "We do expect continued headwinds this year in our hunting business from lapping the guns and ammo business we saw for most of last year." Although a sizable share, management should be able to continue to grow revenue through their rapid expansion plan. The first quarter of 2014 has already shown the viability of management's plan with revenue growth of 8% y/y.

Which Represents A Better Value

Dick's operates in the outdoor recreation business. This business segment has been able to grow steadily over the years. Even during the recession, outdoor recreation spending increased. Dick's management believes there is significant demand for rapid store expansion. They have decided to spend heavily and opened over 6% more stores in 2013. Management is focused on delivering rapid growth from their e-commerce business. They are pushing hard to double the segments revenue by 2017.

Dick's current valuation is very reasonable compared to their direct peers. Management is committed to returning shareholder value through dividends and share buybacks. In many retail segments, companies are focused on reducing their physical retail space. Yet, Dick's and other outdoor recreation retailers are expanding their operations and sales. Dick's represents a reasonable value to gain exposure to this rapidly expanding retail segment.

Source: Dick's Sporting Goods Expanding Rapidly