When Dick’s Sporting Goods (NYSE: DKS) reported Q4 results about a month ago, things weren’t so pretty … and investors noticed.
For the quarter, earnings came to $1.03 per share — a 17% improvement over the same period a year ago, but short of the Street’s $1.06 per share consensus. Revenue was also light at $1.81 billion — $ 5 billion below expectations.
The company’s outlook wasn’t much better, either. The EPS forecast of 47 to 49 cents was under Wall Street’s estimate of 50 cents.
DKS tumbled nearly 10% as a result and has only gained back around 3% since the drop.
The real question, of course, is whether Dick’s growth is coming to an end, or if the sell-off is a chance to snatch up some shares. To see, let’s take a look at the pros and cons:
Stores-Within-a-Store: This growing retail trend of “mini-shops” is a major competitive advantage for Dick’s. Of course, it’s about more than just setting aside part of a store for a certain type of merchandise. Instead, the company invests large amounts to train its workforce to provide top-notch service and advice. It is the largest employer of PGA and LPGA pros in the industry, while countless stores also have certified bike techs and fitness trainers. The strategy has attracted the interest of mega brands like Nike (NYSE:NKE), Under Armour (NYSE:UA), Adidas (PINK:ADDYY) and North Face and many have even provided exclusive access to their products, which has allowed for higher margins.
Online and Mobile: Dick’s also continues to make investments in its digital business, which has paid off nicely. From 2009 to 2012, e-commerce revenues went from $103 million to $300 million, while DKS believes the market opportunity is roughly $5 billion and that it can easily triple the business by 2015. Dick’s realizes that mobile will be a key growth driver as well. To this end, the company recently launched a new mobile site and app, which allows for shopping and loyalty rewards.
Private Label Brands: This should be another driver, especially for margins. Dick’s has been aggressive in buying companies and brands, such as Top-Flite, Field & Stream and Max Slide. The company has also built its own brands, like True Runner. Dick’s thinks it can reach about $1 billion from its private label business by 2017 — an amount that is 17% of current revenue levels.
Supplier Dependence: Of course, deals with mega brands can be a double-edged sword. Nike, for example, represents about 17% of all merchandise purchases, while Dick’s is also heavily reliant on other vendors like Under Armour. Such suppliers might use their clout to exact better terms or cut back on rebates, volume discounts or cooperative advertising. If so, there could be more pressure on pricing.
Same-Store Sales: This metric was anemic in the most recent quarter, with overall growth coming to a mere 1.2%. On top of that, there was actually a 2.2% decline for the core Dick’s stores. While the aforementioned e-commerce business has helped offset the weakness, sliding same-store sales could be a red flag that the growth story is really over.
Lack of Agility: In the fourth quarter — which is the most important quarter for countless retailers — DKS had some flubs with its inventory. To start, the warm weather threw a wrench in things, as many items were understocked. Dick’s also suffered from the downfall of Lance Amstrong, as the company’s Livestrong apparel and equipment suffered greatly. While such problems are inevitable — and nearly impossible to prepare for — Dick’s doesn’t seem as agile as other companies, like Nike, when dealing with the volatility in the sports market.
All in all, Dick’s has been a solid growth story over the past decade, booking an average return of about 23%. Lately, though, the sports retailer has been showing some weakness between slipping same-store sales and inventory struggles.
Plus, because DKS is currently the largest operator in the industry — with a footprint of nearly 520 stores — it could make it even harder to find new market opportunities.
In light of all this, the cons outweigh the pros for now. I wouldn’t swing for Dick’s Sporting Goods at this point in the game.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.