The world of retail is a finicky one where consumers’ perception of merchandise assortments can make or break a retailer’s numbers in any given year. Consumer tastes are always changing, making it difficult for corporate buyers to anticipate what fashions will captivate shoppers’ interests when they make purchase orders for goods months before they hit store shelves. Some buyers are simply better than peers at identifying merchandise people will want. The same holds true for specialty retailers that design and manufacture their own merchandise.
A number of retailers continue to look to celebrity endorsements and lucrative private-label lines to increase diversification and prop up margins. Sometimes these bets (or the merchandise selection in general for that matter) don’t strike a chord with consumers, and retailers are forced to clear merchandise via increased discounts and promotions, at the expense of margins. Also, one retailer may become more aggressive with pricing, forcing peers to follow suit. Thus, it is important to monitor how much clearance activity has taken place recently.
Often times, even desirable merchandise and a solid strategy aren’t enough to overcome a challenging environment. Astute retail investors consider the buying power of a retailer’s clientele, and how current and future macroeconomic factors, such as home prices, the unemployment rate, the savings rate, payrolls, indebtedness, and recent stock market performance play into where and when people choose to spend their hard earned disposable income. Also, if a retailer's store count is concentrated in a specific region, investors should consider the economy of said region when conducting analysis.
We screened the Retail Soft Lines, Retail Hard Lines, and Retail Store Industries and came up with a list of 80 profitable companies. We only considered those with sales growth above 10% in the past year and long-term price appreciation potential above 70% (see list at the bottom of this page). We have chosen to highlight a long-time Wall Street darling and growth stock, Dick’s Sporting Goods (DKS).
Dick's Sporting Goods, Inc.
Dick's Sporting Goods is the leading sports and fitness retailer in the highly-fragmented United States sporting goods market. The company offers private and national brands in the sporting equipment, apparel, and footwear categories. It also operates several successful “store-within-a-store” concepts like Nike Fieldhouse, Under Armour All American, and Adidas Shops.
As much as Dick’s Sporting Goods has been an excellent growth stock over the past five years, it still has further room to grow, in our view. Indeed, the company’s long-term goal is to generate $10 billion in sales by the end of 2017. This would reflect sales growth of over 61% compared to the tally achieved in fiscal 2013.
A big part of the growth Dick’s foresees is in its e-commerce business. In the fiscal fourth quarter of last year, online sales made up 12.2% of the total, and grew 65% year over year. To put this growth rate into perspective, the company reports that the overall online sporting goods market advanced 19% per year from 2009 to 2012, whereas Dick’s online outfit grew 41% in that same time period. Clearly, DKS is gaining market share, and we credit an informative marketing campaign and new tablet and mobile phone apps for the strength. Moreover, the company is implementing new shipping strategies like Buy Online, Pick Up In Store, as well as Ship From Store. The latter initiative is much more profitable than simply buying online and shipping the merchandise from a distribution center.
The other major growth opportunity we see is in an aggressive store expansion initiative. At the end of calendar 2013, Dicks had 558 Dick’s Sporting Goods locations. Management hopes to bring that number to 815 by 2017, and is expecting to open 50 stores this year. The company will focus on small markets where only a single store will exist. It will also consider markets where stores already exist but, its presence is underpenetrated. For example, the company’s store base is low in Florida, and there are only 25 locations in the entire state of California at the moment. To be sure, the company will keep a close eye on any cannibalization that may occur when opening up stores in existing markets. Elsewhere, Dick’s plans on expanding on its latest concept store, Field & Stream this year. These stores offer hunting, fishing, camping, and shooting gear. Three locations are open now, and eight are expected to come online in 2014 and be accretive to earnings the following year. Investment in these new locations will likely shave $0.03 off of Dick’s bottom line this year, but we think the concept is promising overall.
The company delivered some upbeat guidance during its last earnings call. Despite investment in e-commerce and the Field and Stream concept likely taking $0.06 off the total, earnings per share are still expected to be 14% higher year over year at the midpoint of its $3.03 to $3.08 guidance range. Same-store sales are expected to rise between 3% and 4%, on top of a 1.9% increase in 2013.
Overall, Dick’s knowledgeable staff, focus on e-commerce, store expansion opportunity, breadth of product, and lucrative private label brands should help drive its earnings per share and stock price in the coming three- to five-year period. Although there are less costly stocks out there, we think these shares are suitable for most investors over the long-haul.
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||Proj 3-5 Yr % Price Change
|Dick's Sporting Goods
|Pier 1 Imports
|Amer. Eagle Outfitters
At the time of this article's writing, the author did not have positions in any of the companies mentioned.