Sometimes, being last is best. That is the case with Dick’s Sporting Goods (NYSE:DKS). For all intents and purposes, Dick’s is the last man standing in the sporting goods retail sector, but Dick’s stock isn’t quite reflecting that.
This whole sub-sector of the retail industry has been decimated by bankruptcy after bankruptcy after bankruptcy, as athletic apparel brands have shifted their selling models from wholesale to direct.
The net result? The sporting goods retail space has shrunk. By a bunch. And, it is no longer big enough to accommodate multiple high-volume players. So, sporting goods retailers are going under one by one, and the outlook has been all doom and gloom.
But, Dick’s is actually doing pretty well while all its peers are falling. The company just reported second quarter earnings. The numbers were pretty good. Comparable sales growth is still sluggish, but margins are dramatically improving and profits are growing.
What’s the implication? Dick’s is surviving while its competition is dying. It’s hard to imagine a world where sporting good retailers by and large don’t exist at all. Thus, once the shrinking of this market stops, Dick’s will be the last man standing, with no competition and with a ton of market share to gobble up.
That is why Dick’s stock looks compelling here and now. This isn’t a big winner in the near-term. But, it is a stock which has big growth potential in a long-term window.
Sporting Goods Retail Is Consolidating
There’s no secret about it. The shift to ecommerce and direct selling channels has decimated the sporting goods retail industry. One by one, sporting goods retailers are going under.
Sports Authority? Bankrupt. Sport Chalet? Gone. MC Sports? Gone, too.
The list goes on and on, and the takeaway is that the whole sporting goods retail sector is shrinking. By a bunch. So much so that the market can’t support multiple high-volume players. As a result, a lot of retailers are being squeezed out.
This market is consolidating, though, not disappearing. It is really hard to imagine a world where Nike (NYSE:NKE), Adidas (OTCMKTS:ADDYY), Under Armour (NYSE:UAA), and others sell all their stuff through their own direct channels. Sure, that model has worked really well for Lululemon (NASDAQ:LULU).
But, consumers were never used to getting Lululemon clothes anywhere besides a Lululemon store. When it comes to all the other brands in this space, consumers are used to going to a big store and finding all the brands in one location.
Consumers will have a tough time letting go of that all-in-one convenience. Brands also don’t want to completely divorce from that model. Retailers like Dick’s have tremendous reach, and eliminating Dick’s would mean constraining brand reach by a whole bunch.
As such, the sporting goods retail sector will live on. It will just be a lot smaller tomorrow than it was yesterday. But, when it comes to Dick’s, that doesn’t really matter. All of their competitors are going under. Thus, when all is said and done, Dick’s will be the last man standing, and have a ton of market share to gobble up.
Dick’s Stock Looks Undervalued
Right now, Dick’s stock looks undervalued considering its long-term growth potential through sports retail industry consolidation.
DKS stock trades at just 11X forward earnings and has a 2.2% dividend yield. Those are the sort of metrics you would expect from a utility company with essentially zero long-term growth potential.
But, if Dick’s can be the last man standing in this space, then long-term earnings growth looks compelling through huge market share gains.
As such, there is a reasonable argument that long-term, Dick’s is actually a growth company. In such a scenario, Dick’s would warrant a way bigger multiple. Thus, in the long-term, Dick’s stock could head way higher behind earnings growth and robust multiple expansion.
Indeed, the Dick’s of today looks a lot like the Best Buy (NYSE:BBY) of yesterday. A few years back, everyone thought that the electronics retail segment was dying and that Best Buy would follow peers into extinction. But, that never happened.
Instead, the electronics retail sector stabilized, and Best Buy was left as the last man standing. They gobbled up market share, and BBY stock soared.
I wouldn’t be surprised to see a similar dynamic play out with DKS stock over the next several years.
Bottom Line on Dick’s Stock
Near-term, Dick’s is likely stuck in neutral until comparable sales growth trends start to improve and reflect moderating declines in the entire sporting goods retail sector.
Medium-term, once those declines moderate, Dick’s stock should head higher because the valuation is dirt cheap. And, long-term, Dick’s could follow in the footsteps of BBY stock as the company benefits from being the last man standing and gobbles up market share.
As of this writing, Luke Lango was long DKS.