E Dick's Sporting Goods: A Value Story

Recommendation Summary

C:\Users\outcon\Desktop\DKS\stock price.png

*Source: Bloomberg

In my opinion, Dicks Sporting Goods (DKS) is a company going through big changes, and the volatile stock price reflects that. So with all the changes going on, is the company worth the ~$36 per share price today?

Last year Dick’s removed guns from 10 stores and this year the company expanded its strategy, halting gun-sales and ammunition at 125 stores, targeting mainly locations with struggling firearms sales.  The company also announced it would replace Reebok merchandise on its shelves with their own in-house private label apparel brand. As a result of these changes, analysts have put an overall hold recommendation on the stock with a price target of $37 per share.  

I believe that by dropping Reebok and replacing it with an in-house brand the company can actually increase operating margins in the long-run. With these shifts in company strategy, I would expect a drop in the stock price this year, before the company stabilized and starts to profit. I think most of the expected changes are positive, but it will take time before the company rebounds.

Investment Thesis

C:\Users\outcon\Desktop\DKS\Home.png

*Source: Company Presentation

As of today, Dick’s e-commerce business remained strong throughout the year and increased 17% over last year. As a percent of total net sales, online business increased to 23% compared to 19% in the same period last year. I expect the increase in online sales to help the company’s margins, but ultimately I think the main revenue driver in the years ahead will be DKS’s in-store experience. This past February, the company rolled out nearly 150 in-store HitTrax batting cages across the country, giving baseball and softball players the ability to test bats for free before making a purchase. This, coupled with the strengthening of the company’s private-label assortment, could have a positive future outcome for Dick’s. With expanding its in-house Calia athletic wear brand to 80 stores and launching a new outdoor apparel brand, the company positions itself well for the coming change.

Below you can find several company metrics (based on my calculations) and see where the company stands right now. The numbers I have used for calculating these metrics are as follows, share price of $36.6 dollars per share, Enterprise Value of $3,557 million and an EBIT of $328 million (EBIT has been calculated by including an adjustment for operating leases of $-117 million dollars):

  • P/E Ratio – 11.29x – US industry average: 25.19x.

  • EV/Revenue – 0.4x – US industry average: 0.95x

  • EV/EBIT – 10x -  US industry average: 14.6x

Keep in mind that the numbers I have used for global and U.S. industry averages were taken from professor Damodaran’s website.

Per the numbers presented above, the company trades at below the global industry averages for the sector. These numbers may not incorporate the true underlying value of the company, but offer a quick overview of where it sits in a market of its peers.

In the graph below, you can see how the company’s operating metrics have performed through the last few years. We can also clearly see margins falling in 2016 and experiencing only a slight downward trend from 2016 through 2018, this was mainly due to the low-margin hunt and electronics business:

*Source: Company filings and author’s own estimates

Recent Results

Dick’s recorded a Q4 18 revenue of $2,492 million, representing a yearly decrease of 6.46% for the quarter, this reflects the impact of the calendar shift, which negatively impacted sales by $39 million and the impact of the extra week sales from last year which generated $105 million. Gross profit in the fourth quarter was $694.6 million or 27.87% of net sales, a 168 basis points decline versus last year. The decline in gross margin was driven by higher shipping, fulfillment and freight costs as a result of our strong e-commerce growth and by occupancy deleverage.

In the graph below you can see that the lowest point of operating margins were in Q3 18, this is mainly due to a lower sales number and a higher operating expense as a percent of revenue. The lower revenue number was because of the impact of the calendar shift which negatively affected sales by $41 million or $0.10 a share in the quarter.

Source: Company filings and author’s own estimates

New Facilities

C:\Users\outcon\Desktop\DKS\Dicks.png

*Source: Pressconnects

I think the key to driving Dick’s revenue growth could be a new, highly automated order fulfillment center in Conklin. Such a center would help the company with faster deliveries, thus improving customer experience.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments

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Donald Kaplan 1 month ago Member's comment

Good read.

Christian Stoyanov 1 month ago Author's comment

Thanks

Danny Straus 1 month ago Member's comment

Adding batting cages to Dick's store was a brillaint idea! I really appreciate that kind of innovation and out of the box thinking for a company.

Christian Stoyanov 1 month ago Author's comment

They will have to add some more in-store experience for sure, but it is a good start. Digital sales is growing.

Alpha Stockman 1 month ago Member's comment

On the one hand, yes, adding batting cages is a brilliant idea. I can see that definitely driving higher sales of bats. But what percentage of total sales are bats? Compare that to the incredibly dispropriation amount of space required to house those batting cages. And the added insurance costs to protect people from injury. I wonder if the added value is worth it.

Dean Gilmore 1 month ago Member's comment

It's just a gimmick to get people in the door. Sure they'll have some people going just for fun, or to try out a single new bat. But once in the store, they may buy all their sports equipment there. Overall, I thing it's a good idea to drive more business to #Dicks. The better question is, what's to stop #FootLocker from doing the same thing.

Christian Stoyanov 1 month ago Author's comment

I do get it yeah, on a sales per square foot they will lose some money at the start, but to be honest it would make me want to go there more. Bringing more people into stores could offset the loss on the sales per square foot.

Bruce Powers 1 month ago Member's comment

Yes, I agree 100%. It's like how Starbucks spent a lot of money to change the atmosphere of going for a cup of coffee. Sure cushy chairs and sofas took up a lot of space, but business exploded. Same concept.

Angry Old Lady 1 month ago Member's comment

Good read. Though I find it ironic the #Dicks likely spent millions of dollars on a state of the art facility to achieve parity with Amazon's ability to offer 2-day shipping. Then right after it opens, Amazon ups the ante to 1-day shipping.

Christian Stoyanov 1 month ago Author's comment

Thanks for taking the time to comment.

They really did and although Amazon does have the moeny to beat them they ain't the whole market.

I think there is still value to be had in $DKS.

Leslie Miriam 1 month ago Member's comment

Angry Old Lady, Ouch! Lol, that has to hurt!

Beating Buffett 1 month ago Member's comment

Excellent article and very thorough analysis on $DKS and $FL.

Christian Stoyanov 1 month ago Author's comment

Thank you for the positive feedback!

I will be looking at $GHG next hope it brings some value your way.

Dean Gilmore 1 month ago Member's comment

Will be looking forward to that. Haven't been able to find any reliable coverage on that company.

Beating Buffett 1 month ago Member's comment

Thanks, looking forward to to the $GHG article.