There is no doubt that Americans love sports and competition. Typically, we only think of professional athletes or team owners as being in a position to profit from that situation. However, there is a way that virtually anyone can make very solid profits over many years: by investing in the businesses that supply us with the equipment we use in pursuit of our love of sporting activities. The global sporting goods industry is projected to reach total sales of $303 billion in 2015 and the U.S. is the world’s leading consumer of these products. Anytime the numbers are this large, it is worth looking for the opportunity to profit.
Sporting goods superstores
Generally, when most people think of “superstores,” businesses like Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) come to mind, and that is to be expected. However, in the minds of sports and outdoor enthusiasts, the names are just as likely to be Dicks Sporting Goods Inc (NYSE:DKS) Goods, Cabelas Inc (NYSE:CAB) or Bass Pro Shops. All three of these large retailers specialize in offering a wide variety of products for the sports and outdoor enthusiast, but Dick’s covers the broadest range, as Cabela’s and Bass Pro Shops tend to cater more to the hunting and fishing crowd. These businesses offer shopping in large “superstore” type formats as well as catalog and on-line sales.
A good outdoor superstore
Cabelas Inc (NYSE:CAB) actually achieved a large part of its name recognition through the distribution of mail order catalogs long before the Internet was an integral part of our daily lives. Based in Sidney, Nebraska today, it was started in 1961, literally at the kitchen table of Dick and Mary Cabela as a mail order business. From those humble beginnings, the business has grown to 44 stores in 27 states and three Canadian provinces, in addition to its robust mail order catalog and Internet business. Today, the company boasts a $3.98 billion market capitalization.
Cabelas Inc (NYSE:CAB) has increased its earnings at an annualized pace of 14.57% over the last five years with an average net margin of 4%. With earnings projected to continue growing at a pace of 16.4% per year for the next five years and a current P/E ratio of 17.44, it would appear the stock is quite reasonably priced. However, 5-year average returns on equity, assets and capital of 10.6%, 3% and 4.4% do not indicate exceptional capital efficiency, which always concerns me.
A better superstore investment
Dick’s Sporting Goods was founded by Dick Stack in 1948 with $300 he received from his grandmother that was stashed away in her cookie jar. Just as with Cabelas Inc (NYSE:CAB), Dicks Sporting Goods Inc (NYSE:DKS) was started in a family kitchen; it’s just that this one was a grandmother’s.
Maybe it is because of that $300 head start over Cabela’s, maybe not, but today Dicks Sporting Goods Inc (NYSE:DKS) sports a market capitalization of $5.86 billion. Over the last five years, they have increased earnings by an average of 14.06% per year and sales by an average of 8.46%. The business is valued at 16.7 times 2013’s projected earnings and has a 5-year projected earnings growth rate of 16.6% per year, making it very fairly valued.
However, unlike Cabelas Inc (NYSE:CAB), Dicks Sporting Goods Inc (NYSE:DKS) has produced 5-year average returns on equity, assets and capital of 13.4%, 6.8% and 10.2% respectively, which are numbers far superior to those produced by Cabela’s. Furthermore, while Cabela’s is mainly focused on hunting, fishing and camping related items, Dicks Sporting Goods Inc (NYSE:DKS) offers a wide selection of items related to a much broader range of sports and activities.
The remora of sporting goods
A remora is a fish that attaches itself to larger fish and lives off the scraps created when the larger fish feeds. It appears that Hibbett Sports, Inc. (NASDAQ:HIBB) may well be the remora of sports retail as they tend to be found in strip malls adjacent to a Wal-Mart. As an avid outdoorsman and sport enthusiast, I know that Wal-Mart Stores, Inc. (NYSE:WMT) is not the name that leaps to mind when I am seeking to acquire new equipment; they simply don’t have the overall quality and selection I require. Hibbett Sports, Inc. (NASDAQ:HIBB) targets those shoppers who simply can’t satisfy their sporting needs with a Wal-Mart selection; so much for those who believe Wal-Mart is the death of all other retail.
Hibbett Sports, Inc. (NASDAQ:HIBB) takes another bit of experience from Wal-Mart Stores, Inc. (NYSE:WMT) in that it locates its 5,000 sq. ft. stores in small- to mid-sized communities and uses Wal-Mart to concentrate its customers. The results have been superb. Profits have improved at an annual average rate of 19.07% for the last five years and net margins have averaged 7.1% during that time; sales have grown at 9.47% a year as well. The 5-year annualized returns on equity, assets and capital of 26.8%, 16.7% and 24.2% are simply stunning, and the 2013 P/E of 17.8 is only slightly above the projected 5-year growth of 15.62%.
Final Foolish thoughts
While there is nothing in the Cabelas Inc (NYSE:CAB) numbers that would cause me to consider it a bad investment, the negative aspects of the capital efficiency prevent me from considering it a compelling opportunity.
Dicks Sporting Goods Inc (NYSE:DKS) offers a well-diversified product mix and has a solid record of producing good results from operations. Its current valuation warrants serious consideration from investors seeking long-term capital gains between 10% and 13% per year.
Hibbett Sports, while offering a more limited selection than the other two options selected does offer a more risk adverse profile due to the smaller size of each individual store. They have also positioned themselves very intelligently by allowing Wal-Mart to concentrate their customers for them. This business is a strong buy and should produce annual returns of 15% or more.
The article A Sporting Way to Make a Winning Investment originally appeared on Fool.com is written by Ken McGaha.
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