DICK's Sporting Goods, Inc. is a sporting goods retailer selling 1) sporting equipment (46% of revenue), 2) apparel (33%), 3) footwear (19%), 4) accessories (2%). The company operates 731 locations across the US. DICK's also own/operates 98 Golf Galaxy specialty stores - selling golf equipment - and 22 Field & Stream specialty stores - selling outdoor equipment for hunting, fishing, archery, camping etc. The company also owns/operates GameChanger - a youth sports mobile app for video streaming, communications and logistics such as scorekeeping and scheduling.

Most of DKS's stores are on a lease term. Over the next 5 years, roughly 2/3 of the lease will be subjected to renew, allowing room for DKS to renegotiate, redesign and/or relocate its storefronts. The company periodically reassess its merchandises and stores relocations to also open, close and revamp stores. This year (2021), DICK's plans to relocate 11 stores and open 6 new traditional stores, and open 2 new Golf Galaxy specialty stores and convert 2 Field & Stream stores into Public Lands stores, a new outdoor concept recently announced by DICK's.

 

Adapting to the changing times, eCommerce/online sales have grown to be a greater share of total sales in recent years. Though the uptick online sales in 2020 could be notably attributed to in-home stays mandated by many states, the trend over the past 5 years still points to a increase in eCommerce over time.

DKS purchases from roughly 1,300 vendors, with Nike being the biggest, accounting for 19% of merchandise purchase. Merchandises purchased are then delivered to DKS's 5 regional distribution centers from which goods are shipped to DKS's stores. Roughly 90% of merchandise received in DKS were shipped from DKS's distribution centers, with the remaining ones received directly from the merchandize vendors to DKS stores.

 

The retail sporting good segment is cyclical. Over the past 10 years, Dick's have been through 2 cycles of shrinking/expanding margins and stores sames growth/declines. Gross margin of the business

 

The retail sporting market is tough, and DICK's underperformed in recent years as a result of fierce competition from the likes of Underarmor. Margins took a hit and and same stores sales growths have also been disappointing.

 

2020 was a turning point.

 

FY2020 was a great year for DKS. Though the boost from stimulus checks, to working from home, were temporary, Dick's sustained great operating momentum in 2021, raising guidance twice YTD. The company also announced on its Q2/21 call on Aug 25, 2021 that it would 1) pay a special dividend of $5.50/sh; 2) increase quarterly dividend by 21% to $0.4375 per share or $1.75 on an annualized basis; 3) double buyback to a minimum of $400 million. Shopping traffic continues to accelerate and gross margin expectation remains robust. The company is also leveraging storefront to fulfill online orders. Q3/21 will also be marked by back-to-school and back-to-sports dynamics that will further support sales. The guidance that was raised for the 2nd time also increased DKS's H2/21 margin and sales figure; so Q4/21 figures are brought up as well. All these tailwinds point to another great year for DKS.

 

Over the next 12 to 24 months, DKS should continue to benefit from a recovery of activities across the US. As back-to-school and regular life continues emerge, recoveries in outdoor and sporting activities should drive demand. As the largest sporting retailer in the US with 7% market share, DKS is well positioned to capitalize on the recovery trend.

 

Over the longer term terms of beyond 2 years, DKS still has much running room in the $120 billion market.

In addition to healthy topline and comparable stores sales growth, some margin improvement should also be expected. New stores based on fresh concepts/designs are also generating traction. DICK's opened in Q2/21 two House of Sports stores in Tennessee and New York. These are new concept stores differentiated from traditional retailer stores in that House of Sports offer collection of interactive facilities such as rock climbing walls, track and field, mini golf courses etc, on which shoppers can try out equipment and engage in actual sports activities. So far, both stores have exceeded expectations and Dick's is in the process of opening a 3rd. Additionally, eCommerce has become a more important part of the business. In this area, Dick's has been undergoing internal structuring to optimize operations. By leveraging the actual stores instead of the companies 5 distribution centers for deliveries, DKS is saving on fulfillment costs. All these have translated into a 5-6% margin increase from 2020 level. Though without quantification that some of these growth margin improvement has always been the result of the company having less clearance items (from supply disruptions in South Asian), management indicated that substantial portion of the 5%-6% margin increase is here to stay. 

 

 

 

DKS used to trade at a premium to peers prior to experiencing the 2015 - 2019 period of margin erosion. However, with persistent tailwind on covid-recovery, new concept stores gaining tractions, and online sales better supported by retail store infrastructures, most of the 5% to 6% margin improvement is here to stay, as management already laid out on the call. From these, I'd expect EBITDA margin to get back to the 11%+ over the longer term, and the valuation discount that has been assigned to DKS to be lifted.

Even trading in line with peers, DKS should have a 36% upside. Applying any premium to the name, DKS should have a much higher upside.

Amazon and big tech penetration: Though a substantial appeal of DKS remain its brick & mortar stores where shoppers can try out merchandize and interact with sporting equipment, eCommerce has become more prevalent. This make DKS progressively more vulnerable to formidable eCommerce juggernaut/specialist like Amazon. The continued penetration by the likes of Amazon in online sales of sporting goods constitute an overhang for DKS as it adapts to online selling. To address this risk, investors should continue monitoring DKS' eCommerce segment. A further migration of sales from brick & mortar to online would bring more weight to this Amazon risk. So it's worth questioning management on how to address this competitive threat if/when eCommerce becomes a bigger portion of DKS sales (ie 2/5 of total sales etc.)

 

Execution blunders: The success of retail brick & mortar stores depend aplenty on execution and geography. Yet there are no way of knowing how successful execution is prior to companies opening stores. DKS would be subjected to this execution risk typical to other retailers. For the near term, holders should pay attention to the roll out of House of Sports segment. This is a budding/growth area for DKS in redesigning new concept for brick and mortar stores. So far roll-out of the two stores have brought success, but prospects may change on new ones.

 

Covid related shutdowns: The current short term thesis on DKS is underpinned by a return to sports and activities as covid relinquishes its grip on the world at large. If mutation more severe than the delta strand emerges that takes the world back into the darkness and lockdowns, return to sports demand would evaporate.

 

Margin pressure resumes: the core long term thesis on DKS is underpinned by an improvement in margin that's been largely cemented by internal structuring to support eCommerce sales, narrowing of distribution channels by vendors, and rearranging product lines. Should the benefits from these initiatives turn out transient, margin pressure could resume and place an overhang on DKS compared to its peers.

 

Sustained growth in 2021 and 2022 from return to sports/school.

 

Sustained margins proving to the market of new norm.

 

 

DKS is trading at an discount to peers because of margin and tepid sales over the 2015 to 2019 period. The overhang that's weighed on the stock seems to be lifted now on the backdrop of companies reporting much better results since covid-19. Operating momentum remains high and the company has already raised guidance twice this year. The level of cash return is also unmatched compared to its peers that've also emerged from covid in less than ideal positions. For the next 2 years, return to normal/sporting demand should continue to climb as people are fed up with covid and lack of physical activities. Operationally, there is also margin improvement of 500-600 basis points mainly driven by company shifting product lines, narrowing distribution channels and vendors, and better eCommerce delivery strategy that leverage stores infrastructure instead of distribution centers. The topline growth driven by macro dynamics and the margin improvement from a micro level should lift the overhang on the stock and allow it to trade in line or at premium to peers. DKS used to trade at a premium to peers before margin pressure brought down the stock to a valuation discount. I surmise that it would be reasonable for DKS to trade above peers again if margin improvement that we saw in 2021 so far stays.

Sustained growth in 2021 and 2022 from return to sports/school.

 

Sustained margins proving to the market of new norm.