Dick’s Sporting Goods Has Raced to the Lead, but Rivals and Economic Conditions Remain Threats

Senior Equity Analyst

David Swartz

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We believe no-moat Dick’s Sporting Goods lacks an edge as sporting goods are sold through many channels. Although its sales and profitability growth over the past three years has been very impressive, we believe a slowdown is likely, as sporting goods retail is vulnerable to external competition. According to IBISWorld, sporting goods retail sales experienced average annual growth of just 1.3% in the five years before the pandemic. While Dick’s recent sales growth has generally outpaced this level, many of its rivals have posted strong results of their own, suggesting unusual industry momentum. The firm’s competitors include e-commerce operators (such as wide-moat Amazon), mass retailers, specialty stores (narrow-moat Lululemon, Foot Locker, Bass Pro Shops/Cabela’s), and branded stores and owned e-commerce from major vendors. As an example of the latter, wide-moat Nike’s direct-to-consumer sales constituted 42% of its fiscal 2022 Nike brand revenue sales, up from less than 20% before 2015. Further, we think the COVID-19 crisis has accelerated manufacturers’ direct-to-consumer efforts, as evidenced by Foot Locker’s acknowledgement that Nike has reduced shipments to the firm. We do not believe Dick’s market position is strong enough to prevent vendors from offering their merchandise in alternate channels. We forecast its compound average yearly sales growth of 3% over the next decade.

We do not think the gains in Dick’s recent profitability can hold. The firm has successfully doubled down on stronger categories like athletic footwear, athleisure, and team sports while reducing its dependence on hunting. It has also strengthened its e-commerce. However, over the next decade, we anticipate operating margins will recede from the 16.5% and 11.8% recorded in 2021 and 2022, respectively, as we do not believe it has pricing power. Moreover, we do not think the firm needs its large store base of more than 850 stores, especially as online sales continue to rise.

Business Strategy & Outlook

We assign a no-moat rating to Dick’s, as we do not believe the company has established an intangible asset or cost-based advantage over competitors. While it is the largest independent sporting goods chain in the U.S., intense competition from e-commerce, mass-market retail, outlet stores, and specialty stores has reduced customer traffic and eroded its operating margins. Dick’s sales have soared during the pandemic, but it had been struggling despite an aggressive store expansion. In 2014, the firm reported $559 million in operating profit on $6.8 billion in sales (8.1% margin). Five years later, it reported $8.8 billion in sales but adjusted operating profit of only $442 million (5.1% margin). Dick’s recorded sequential declines in its operating margins in every year from 2012 to 2019 and its gross margins have also trended downwards. Due to a surge of sales during the pandemic, Dick’s operating margin jumped to an astounding 16.5% in 2021, but it dropped to 11.8% in 2022, and we anticipate it to trend downward over the next decade.

Providing evidence that it lacks a competitive edge, we estimate Dick’s adjusted returns on invested capital, including goodwill, fell short of its estimated weighted average cost of capital of 10% in the four years prior to 2020. While its adjusted ROIC skyrocketed to 44% in 2021 and remained strong in 2022 (27%), we believe these were peak levels and forecast steady declines to the teens by the latter part of this decade.

We believe Dick’s faces direct competition from numerous strong U.S. retailers. Competitors include wide-moat Walmart, wide-moat Amazon, narrow-moat eBay, JD Sports, Bass Pro Shops/Cabela’s, Foot Locker, Academy Sports & Outdoors, REI, and Hibbett Sports. Dick’s is the largest pure sporting goods chain in the U.S., but many items in its inventory are available at other stores and online. While we believe its relationships with vendors are generally good, its largest vendors also have relationships with other retailers, some of which are much larger. Walmart, for example, has more than 5,000 stores in the U.S., about 6 times as many as Dick’s. We think Dick’s has only single-digit percentage share in all major categories. The firm receives only a small amount of exclusive or limited-edition items that achieve premium price points. Moreover, there are some popular and high-priced athleisure apparel items that are not available at the retailer. We do not believe Dick’s has any advantage over its many competitors and, therefore, has no economic moat. 

We view the slowdown in Dick’s store expansion as a sign of competitive weakness. The firm nearly doubled its store base between 2007 and 2022 (to 853 stores at the end of 2022 from 434 at the end of 2007) as it moved away from its East Coast roots. Between 2011 and 2017, Dick’s opened about 35-45 of its namesake stores per year, many in the western U.S. It also expanded its smaller-format, specialty businesses. In 2013, Dick’s opened its first Field & Stream hunting and fishing stores and eventually opened 35 of them. In 2016, Dick’s bought Golfsmith out of bankruptcy for $70 million and converted about 30 stores to its Golf Galaxy brand. However, Dick’s has recently curtailed its expansion plans, having sold, closed, or renamed all its Field & Stream locations in favor of investing in its new Public Lands and House of Sport concepts. Consequently, the size of its total store base is little changed over the past three years. 

We view the introduction of no-moat Under Armour’s gear at Kohl’s as a sign that Dick’s has no moat. In 2016, Under Armour was Dick’s second-largest brand (after wide-moat Nike) and represented 12% of its sales. In 2017, however, Under Armour introduced apparel and footwear at Kohl’s that was much the same as its merchandise available at Dick’s. Within months, Under Armour became Kohl’s second-largest brand (also after Nike) and Under Armour ceased to be a 10% brand at Dick’s. While Dick’s is an important retailer for Under Armour and other athletic apparel brands, we do not think it has any ability to prevent Under Armour or others from supplying their products to competing stores. Indeed, Kohl’s is increasing floor space for Under Armour and other activewear in many of its stores. We do not think Dick’s has any ability to prevent its vendors from supplying competitors with similar merchandise, suggestive of a company with no competitive advantage.

We do not think Dick’s has any pricing power as many of its key brands and items are widely available. In fact, Dick’s has a price match guarantee. If, for example, a set of Callaway golf clubs is cheaper at Walmart, Dick’s will match the price. We think consumers are generally indifferent as to where they purchase sporting goods. Further, we think consumers are likely to check competitors’ prices, especially on big-ticket items like golf clubs. A search for “golf clubs” on Amazon, for example, yields thousands of results. Golf clubs available on eBay, Amazon, the PGA Tour Superstore, and many other sites range from cheap, used clubs to expensive, high-end sets by leading manufacturers. Pricing on new and popular items does not vary much from site to site due to competitive pressures and minimum advertised price agreements. We do not think Dick’s has any pricing power and, therefore, lacks a moat.

We view the growth of direct-to-consumer sales by its vendors as a serious competitive threat that Dick’s cannot counter. Many of Dick’s major brands, such as Nike and Adidas, are investing heavily in both e-commerce and company-owned retail. Further, these brands are making product available through their own channels that is not available at Dick’s. For example, we forecast more than 50% of Adidas’ worldwide sales will be through its own e-commerce or stores that it either owns or franchises by 2028. We think successful brands can improve pricing and margins through direct control. We view the rise of direct-to-consumer sales by major brands as suggestive of a weak competitive position for Dick’s. 

We do not believe Dick’s has any moat based on any intangible assets or other moat sources. The firm has no production cost advantage as it sources its private-label merchandise from the same third-party manufacturers as other sporting goods retailers. Dick’s does not have efficient scale, either, as its distribution system is like that of competitors. There is no network effect in the sporting goods retailing business, and switching costs are nonexistent.

None

Economic Moat

Dick's Sporting Goods

Dick's Sporting Goods, Inc. engages in the retail of an extensive assortment of authentic sports equipment, apparel, footwear, and accessories through a blend of associates, in-store services, and unique specialty shop-in-shops. The company was founded by Richard T. Stack in 1948 and is headquartered in Coraopolis, PA.

Earnings data Q2 2023

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Dick's Sporting Goods, Inc. engages in the retailing of an extensive assortment of authentic sports equipment, apparel, footwear, and accessories. It also offers its products both online and through mobile applications. The company was founded by Richard T. Stack in 1948 and is headquartered in Coraopolis, PA.

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DICK'S Sporting Goods, Inc. (NYSE:DKS ) Q1 2023 Earnings Conference Call May 23, 2023 10:00 AM ET Company Participants Nate Gilch - Senior Director of Investor Relations Lauren Hobart - President and Chief Executive Officer Navdeep Gupta - Chief Financial Officer Conference Call Participants Simeon Gutman - Morgan Stanley Adrienne Yih - Barclays Robby Ohmes - Bank of America Warren Cheng - Evercore ISI Brian Nagel - Oppenheimer Kate McShane - Goldman Sachs Isabel Thompson - UBS Mike Baker - D.A. Davidson John Kernan - TD Cowen Paul Lejuez - Citi Anders Myhre - Guggenheim Chris Horvers - J.P.

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– Delivers 5.3% Growth in First Quarter Net Sales – – Delivers Strong Double-Digit EBT Margin of 11.6% – Delivered 3.4% growth in first quarter comparable store sales, driven by a 2.7% increase in transactions as well as higher average ticket Delivered earnings per diluted share of $3.40 compared to $2.47 or $2.85 on a non-GAAP basis during the prior year Retired remaining $59 million aggregate principal and fully settled all outstanding amounts under the Convertible Senior Notes Reaffirms 2023 outlook (53 week year) and continues to expect full year earnings per diluted share to be in the range of $12.90 to 13.80, including approximately $0.20 for the 53rd week, and comparable store sales to be in the range of flat to positive 2.0% "Our strong start to 2023 demonstrates the sustained strength of our business. We are very enthusiastic about our strategies and continue to invest in our future to fuel long-term growth opportunities, including a return to square footage growth.

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PITTSBURGH , May 2, 2023 /PRNewswire/ -- DICK'S Sporting Goods, Inc. (NYSE: DKS) will announce results for the first quarter of fiscal 2023 before the market opens on Tuesday, May 23 rd.    A conference call to discuss the results will be held that day at 10:00 a.m.

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