DKS - DICK'S Sporting Goods: Solid Company That Is Fairly Valued

2023-05-09 08:53:54 ET

Summary

• DICK'S Sporting Goods has done a great job of transforming its operations over the past several years.
• Its improved margins look here to stay, as long as we don't hit a recession.
• That said, the stock looks fairly valued trading near its 10-year historical average multiple.

DICK'S Sporting Goods ( DKS ) is a solid company that has done a nice job transforming its business over the past several years. However, the stock looks fairly valued.

Company Profile

DKS operates a chain of sporting good retail stores and associated e-commerce websites. The company's namesake store sells a variety of sports equipment, apparel, footwear, and accessories. At the end of January, it had 728 locations across the U.S. In addition, it also owns the Golf Galaxy, Public Lands, and Going Going Gone! specialty retailers, as well as DICK'S House of Sport and Golf Galaxy Performance Center. It had 125 specialty store locations at the end of January.

About 40% of its sales in FY22 were hardlines, which include items such as sporting goods equipment, golf equipment, fishing gear, and fitness equipment. About 34% of its sales were apparel items. Meanwhile, 24% of its revenue came from footwear, including running, basketball, tennis, walking, and hiking shoes. About 2% of revenue came from things such as services, subscriptions, shipping, and credit card processing.

DKS sells both national brands, as well as its own in-house brands. Its in-house brands include Alpine Design, CALIA, DSG, ETHOS, Fitness Gear, MAXFLI, Nishiki, Quest, Top-Flite, VRST, and Walter Hagen. In-house brands represent about 14% of its sales in fiscal 2023. Nike ( NKE ) is its largest vendor, represent about 23% of its fiscal 2022 sales.

DKS also owns youth sports scoring and scheduling app GameChanger.

Opportunities and Risks

DKS has done a great job of transforming its operations over the past several years. One of the core pieces of its transformation has been getting more narrowly distributed and unique products from its vendor. Footwear has been a big area of focus in this regard, as has apparel and team sports.

These items come at higher margins and help differentiate the DKS versus the competition.

And while NKE has focused more on its DTC efforts and away from wholesale partnerships, DKS was able to tie the two companies' loyalty programs together towards the end of 2021. This allowed customers to connect their accounts and get loyalty perks from both companies. At a conference in March, the company said it has over 1 million people that have linked their accounts.

At a Bank of America conference in March Executive Chairman Ed Stack said:

Our relationship with Nike is at an all-time high. With the investment that we're making in the Nike brand, the investments that Nike has made with us, the access to product that we have that hadn't had in the past for a more narrowly distributed product, faster-turning, higher-margin product on both the apparel side and on the footwear side, and we think that we don't -- we see that continuing. And we're very excited about the relationship with Nike. They're certainly the hottest brand in the market today, products across not only just the lifestyle side of the business but also the performance side of the business, what they're doing from a running shoe, the new invincible running shoe, what they're doing from a cleated standpoint, from a basketball standpoint. So they're hitting on all cylinders across all aspects of their business, and we're really excited about that."

Another change that DKS has made that has helped margins is how it gets its old merchandise out of its stores. The company now has 13 Going, Going Gone stores and 43 warehouse plus stores. This gives it both better margins, as well as gets new, fresh inventory into its mainline stores quicker.

Commenting on this at the BofA Conference, CFO Navdeep Gupta said:

This was a key learning that we kind of tested out during the COVID time frame when we couldn't open the 10 stores that used to be right outside of stores. We are very happy with the results that we have been able to drive in the last few years. I think so the biggest driver of success actually is what Ed said, it allows us to move the clearance merchandise out of a normal DICK'S store, allow that space more for the red merchandise to be moved into that store. So we are seeing a better recovery rates, not only in the clearance stores, but even in the DICK'S stores. We are seeing more red product being sold there through the productivity of the square footage within the DICK'S store is higher. The margin profile is much better. And then because you are able to concentrate all of the clearance into this small group of stores, so at the end of last year, we had 13 Going, Going, Gone! store and almost about 43 warehouse plus store.

So the model that we have, which is flexible that we can flex up or down depending on how many stores do we need, the concentrating all of this clearance into these small locations gives us much better access to a value athlete that is looking and finding this product and a really good bargain there. The second thing is we are able to liquidate this product in a much more efficient way and are much better margins than we were able to do before both online and in stores. We are very happy with the strategy."

When looking at growth, meanwhile, DKS will lean into its new House of Sport concept. The company had 3 opened as of mid-March and plans to open 9 this year. The stores will be between 100,000-120,000 square feet with sporting fields where teams can practice next to them. Inside, the stores will have things like batting cages and a rock climbing wall, as well as a health and wellness space. The company thinks it can add between 75-100 of these store concepts in the next 5 years. DKS is really leaning into the experience aspect of these locations and making them a true destination spot.

DKS also has opportunity to continue to grow out its private label business, as well. At 14% of sales, DKS has done a nice job building out these brands. Meanwhile, they carry 600-800bps higher margins than national brands. Continuing to grow share in this area will also help margins.

On the risk side, the economy is the biggest risk at the moment. While people will spend on sports equipment, there are certainly more discretionary items that DKS sells. DKS seems to largely have managed to avoid the over-ordering that has hurt many retailers. Inventory is still up about 23% from last year, although it's up 29% versus 2019 levels on a 38% increase in sales over that time period. It's still something to watch, though.

And while its increased exposure to NKE is a positive, its ties do add some risk. NKE is a big vendor that continues to become an increasing percentage of DKS's sales. It is also a company that in the past has wanted to focus more of DTC sales to help its own margins.

Valuation

DKS stock currently trades just under 7.5x the FY 2024 (ending January) consensus EBITDA of $1.91 billion. Based on FY25 analyst estimates of $1.96 billion, its trades at 7.3x.

It trades at a forward PE of 10.5x the FY24 consensus of $13.44.

The company is projected to grow revenue 3.1% in FY24 to $12.7 billion.

The stock trades around the middle of where other sporting goods retailers trade.

The stock has traded between a 4.9x to 10.2x EV/trailing EBITDA multiple over the past 10 years.

Conclusion

DKS is a solid company that has done a great job of transforming how it does business. Its margins have improved nicely the past two years, and I think the combination of more exclusive and less distributed items along with increased penetration of its in-house brands and its clearance inventory strategy will likely keep them solidly higher than where they have been historically, barring a recession.

I also like the House of Sports strategy and its increasing ties to NKE, including its shared loyalty program. That said, with the stock trading near its historic 10-year average, I feel it is more of a solid "Hold" at this point in time.

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