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Dicks Sporting Goods Inc (DKS): What Risks Could Spoil the Fun for This Sporting Goods Retailer?

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Dicks Sporting Goods Inc (NYSE:DKS)Dicks Sporting Goods Inc (NYSE:DKS) is a sports and fitness products retailer that as of May 4, 2013 operated 520 Dicks Sporting Goods Inc (NYSE:DKS) locations and 81 Golf Galaxy golf specialty retail stores. The company also markets through eCommerce websites and sells through catalogs.

But is it a good investment?

Strategy snapshot

A central part of their strategy is having “brand shops” in their stores, dedicated areas in the store with a large selection of a brand’s products. For example the company had Nike shops in 171 of their stores at the end of 2012, up from 105 the previous year. They are also introducing new brand concepts, such as the Field & Stream store they will open in mid-August. This outdoor products concept allows the company to gain deeper insight into what outdoor enthusiasts, including hunters and fisherman, want — lessons the company can apply to stores throughout their chain. Dicks Sporting Goods Inc (NYSE:DKS) also offers private brands the customers can’t find in other stores, including Adidas baseball and Top-Flite golf. This exclusivity insulates the company from price competition with other retailers.

Latest financial results

For the first quarter ended May 4, Dick’s reported a 4.1% increase in sales to $1.3 billion compared to the first quarter of 2012. Earnings per share rose slightly from $.45 in 2012 to $.48 in 2013. However, consolidated same store sales decreased 3.8%, a larger drop than the company had forecast. For the full year, management believes same store sales will grow 2-3%. The company is definitely in expansion mode, intending to open 40 new stores this year. They also will complete partial remodels of 75 existing stores.

Same store sales declining with the economy on the upswing might be a troubling sign. For perspective let’s take a look at one of Dicks Sporting Goods Inc (NYSE:DKS) competitors, Cabelas Inc (NYSE:CAB), which is a specialty retailer and direct marketer that focuses on the outdoor market, including camping, hunting and fishing.

For their second fiscal quarter of 2013, they reported a strong 10.5%  increase in comparable store sales, which have now increased 7 quarters in a row. Earnings per share were $.62, a nearly 32% increase. The company offers its own credit card through a company-owned bank that customers use for 30% of total purchases at the stores. This gives Cabelas Inc (NYSE:CAB)’s a “stickier customer base,” a Credit Suisse report says. As of April 25, 2013, Cabelas Inc (NYSE:CAB) operated 44 stores.

Company management was thrilled with the performance of their next-generation stores that yielded an astonishing 40% higher sales per square foot than what they term their legacy stores achieved.

Risk factor#1

In Dick’s Sporting Goods’ 10-K, management cites one major risk factor as:

“Our ability to predict or effectively react to changes in consumer demand or shopping patterns”

When you go into a store that is familiar to you, you may not even notice the changes in merchandise and prices that are the result of decisions made throughout the organization. The consumer doesn’t remain static, and neither can a retailer’s merchandising strategy.

This risk affects the choices of product selection a retailer like Dicks Sporting Goods Inc (NYSE:DKS) makes. The company must guess, months in advance, whether their customer base will for example open their wallets more or seek discount merchandise.

So many retail chains carry sporting goods

From the 10-K: “Intense competition in the sporting goods industry”

True, the company does have to compete with an array of other retailers, some much larger and with a greater market presences than theirs. Their business model of grouping a number of specialty stores under one roof allows them to compete by offering a broader product selection than specialty sports stores and offer pricing that allows them to compete with mass merchandisers. Additionally, they capture customers in the “beginner, intermediate and enthusiast” categories by offering each group a large product selection and various price points to fit every budget.

Their expansion strategy — the company had 355 stores at the end of 2007 compared with 520 at the end of the first quarter — addresses the competitive issue as well. Consumers have more opportunities to buy from Dicks Sporting Goods Inc (NYSE:DKS) in more areas of the country, and the brand name becomes more well known.

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