The ever expanding Dick’s Sporting Goods looks fairly valued
With the recent tremendous success that we’ve seen in Under Armour (UA), Nike (NKE), and Adidas (OTC:ADDDF), it’s natural to look at the company bringing these products to the consumer. Not surprisingly, it’s a pretty competitive landscape, and we’re initiating coverage of the biggest player, Dick’s Sporting Goods (DKS) at a fair value of $30 per share. We think the market may be a little too enthusiastic about the company’s growth prospects, and we make our DCF valuation model template (with complete financial statements, historical and forecast) available here, so investors may value Dick's and any other firm in their portfolios.
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Source: Valuentum Securities, Inc.
Riding the sports apparel tailwind
If any company has benefited from the strength in Under Armour, it’s been Dick’s. The company accounts for over 30% of UA sales, and with its premium brand name, has been able to maintain higher average selling prices in the last several years. Additionally, Dick’s has been proactive about stealing share from local running stores with its Nike “store with in a store” concept, which is soon to be adopted for UA.
Furthermore, though the industry is highly competitive, Dick’s reinvestment in maintaining its stores and creating an aethsetically pleasing shopping experience, has allowed them to take share from industry behemoth The Sports Authority. The product mix also tends to be higher quality than regional players like Big 5 (BGFV) and Hibbet Sports (HIBB), making Dick’s the trade-up name, which bodes well in the current low-growth economic recovery.
Over the past several years, Dick’s has expanded via organic growth and acquisitions, most of which have proven to be much more costly than expected. In 2005, the company acquired Galleon’s and spent the next few years taking impairment charges when they discovered it was harder to integrate than expected. As recently as 2009, Dick’s was still taking impairment charges on a small acquisition of California’s Chick’s Sporting Goods. For these reasons, we’d much rather see Dick’s continue to expand by opening its own stores rather than trying to acquire regional players. However, we wouldn’t be surprised to see the company go after someone like Sports Chalet (SPCHA) where it could acquire solid real estate at a bargain price.
Growth inevitable, but it might be less than the market expects
Though we think the company still has room to grow in a few key states like California, Illinois, and Texas, we think the market could be expecting loftier growth than possible. Although management maintains that they wouldn’t reach saturation until they had 900 stores, almost double the 455 they have now, we think that number is a little optimistic. The Sports Authority currently has about the same amount of stores, though they span almost 45 states, and we also think there is too much competition to generate high returns on invested capital over the long run.
Under their current business model, Dick’s stores are too large and require too much investment to enter a lot of the smaller markets that Big 5 and Hibbett dominate on the West coast and in the Mid-Atlantic region, respectively. Furthermore, we think competitive pressures from e-commerce routes will pressure gross margins and the ability to generate free cash flow. Footlocker’s (FL) Eastbay for instance, is the standard in online sporting goods, and we can see a scenario where people go to stores to Dick’s to try-out a baseball bat or glove, then order it from Eastbay or a seller on Amazon (AMZN) to save money.
Additionally, if luxury retailers continue to accelerate sales, we can see the higher-end Dick’s customer simply buy their Nike or UA at Nordstrom (JWN) or Macy’s (M) while they shop for suits. And the party won’t last forever. Eventually, athletic apparel will reach saturation or the fad will be over.
Ultimately, we see really no reason to take a position long or short in the stock at its current levels, though it could get interesting if we see a large move to the upside or the downside. We'd consider adding it to our Best Ideas portfolio as a long if it fell below the mid-$20s range and consider initiating a put position if it rose above $36 per share. The trigger prices are determined by the margin of safety we assign to the stock, as shown in the table above.