Is BBBY’s Meltdown a Preview for Dick’s?

by Daniel Putnam | June 22, 2012 7:00 am

The (NASDAQ:AMZN[1]) juggernaut has left a long list of casualties in its wake, and it now may be drawing blood from yet another victim: Bed Bath & Beyond (NASDAQ:BBBY[2]). After the bell on Wednesday, BBBY missed on revenues and offered up a weak outlook[3] for the rest of the year, leading to a drop of nearly 17% mid-way through Thursday’s trading session. Investors in another U.S. retailer — Dick’s Sporting Goods (NYSE:DKS[4]) — should sit up and take notice.

To understand why, investors can just look at how Amazon has begun to take shares from Bed Bath & Beyond. Earlier this year, Amazon debuted the home goods website[5], which is the latest offering under the company’s Quidsi[6] brand. Amazon purchased Quidsi — founder of the and websites — in 2010 after forcing the company into submission via price cutting. Since then, Amazon has launched (pets), (toys), and (home goods) under the Quidsi umbrella.

At first, investors didn’t take the threat seriously[7]: from’s February 15 debut through Wednesday’s close, Bed Bath & Beyond shares gained 27.2%. Now, however, it appears that Amazon’s efforts have contributed to the abrupt halt in BBBY’s uptrend.

What does all of this have to do with Dick’s given that Amazon doesn’t have a sporting goods site yet? The answer lies on Quidsi’s careers page[8], which has three listings for positions related to sporting goods — indicating that a rollout is coming. Investors therefore need to consider the possibility that Dick’s will soon face the same type of competitive threat that BBBY is seeing now. This bears close watching given that the stock has printed a long-term valuation uptrend that looks very similar to Bed Bath & Beyond’s:

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Click to Enlarge

Dick’s has its share of fans due to its favorable growth profile: analysts are calling for a 24.3% EPS gain this year and 14.3% in 2013. All 29 analysts covering the stock rate it a strong buy, buy, or hold, and the consensus target is $57 — well above the current price near $48.

But at the same time, it also pays to consider the four factors that have led to poor stock price performance in the specialty retail sector:

This is the same combination that has weighed on book stores such as Barnes & Noble (NYSE:BKS[11]) and Borders; the office-supply retailers Staples (NASDAQ:SPLS[12]), Office Depot (NYSE:ODP[13]) and OfficeMax (NYSE:OMX[14]); and the electronics stores Circuit City, Best Buy (NYSE:BBY[15]), hhgregg (NYSE:HGG[16]) and RadioShack (NYSE:RSH[17]). Among those that have survived, all have delivered returns sharply below that of the broader retail sector in the past two years:


Dick’s shares may be working now, but the company faces the similar four-pronged threat as the other retailers that have fallen by the wayside in recent years. The fourth issue — lack of specialization — is key here. The stocks mentioned offered little in the way of specialization to bring shoppers in the door and prevent “showrooming.” Conversely, PetSmart (NASDAQ:PETM[19]) has fended off the first three problems by continuing to provide shoppers with a reason to visit their physical locations rather than taking their business online. Dick’s — which offers no such incentive due to its lackluster in-store shopping experience — is closer to Best Buy than it is PetSmart.

This isn’t the only problem. Dick’s same-store sales growth and average sales per store and square foot (all available here[20]) are at levels that indicate new store openings will be the key to the company’s success. But here, too, the company faces danger — in this case, the potential for saturation. The outlook is therefore spotty even if Amazon doesn’t invade the sporting goods space.

Put it all together, and Dick’s looks like a case where investors would be wise not to ignore the lesson of history. Once a specialty retailer begins to face competition from too many directions, it spells trouble for both margins and market performance. Look for DKS to trade lower in the next 12 to 24 months.

  1. AMZN:
  2. BBBY:
  3. offered up a weak outlook:
  4. DKS:
  6. Quidsi:
  7. didn’t take the threat seriously:
  8. careers page:
  9. WMT:
  10. TGT:
  11. BKS:
  12. SPLS:
  13. ODP:
  14. OMX:
  15. BBY:
  16. HGG:
  17. RSH:
  18. [Image]:
  19. PETM:
  20. here:

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