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Dick’s Sporting Goods Inc (DKS) Stock Offers Deep Value, Regardless of Q2 Numbers

Luke Lango

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Being a contrarian is tough in this bull market. Take the retail sector for example. Just when you thought things were starting to turn around for depressed retailers, the big department stores came out with a slew of disappointing earnings that sent the whole sector back to square one.

Dick's sporting goods dks stock

Source: Mike Mozart via Flickr

And while the sell-off is justified in some names, it is unjustified in others. The market is treating all of retail as one big dying business that has no future. In this sense, the market for retailers appears to be woefully shortsighted. And that is creating a compelling long-term buying opportunity in some severely undervalued names.

My favorite name that fits that description? Dicks Sporting Goods Inc (NYSE:DKS). Here’s why.

In Retail, Size Matters

DKS stock has been in sell-off mode recently because its peers have announced woeful results. Both Hibbett Sports, Inc. (NASDAQ:HIBB) and Cabelas Inc (NYSE:CAB) said comparable sales fell about 10% last quarter. Meanwhile, Big 5 Sporting Goods Corporation (NASDAQ:BGFV) said comps rose less than a percent, versus a near 8% increase in the quarter before.

Those results are pretty ugly, but they don’t really mean much to Dick’s.

As it turns out, not only is DKS stock broadly outperforming its peers, but the company is actually rapidly gaining market share. HIBB and CAB have comped strongly negative for several quarters in a row now. Although BGFV has posted positive comp growth recently due to other retailer bankruptcies, there has been a lot of volatility in those numbers (from essentially flat to up 8%).

At DKS, comps are growing with little volatility (up ~2.5% to up ~5% over the past three quarters).

What’s going on here? Retail is consolidating, and it’s consolidating around the biggest players. That means in specific sub-segments of retail, the smaller players are losing while the bigger players are winning.

DKS is the biggest player in sports retail by a wide margin. Last year, HIBB recorded sales of just under $1 billion, BGFV reported sales of just over $1 billion, and CAB had sales of about $4 billion. DKS, meanwhile, reported revenue of nearly $8 billion last year.

In a long-term view, as the retail world continues to consolidate, smaller retailers will keep going out of business while bigger retailers will gobble up that market share. This dynamic will be prove to be a huge tailwind for DKS stock.

Dick’s Probably Had a Better Quarter than Most Expect

A lot of investors are spooked about DKS stock ahead of its Q2 report, which is due on Tuesday. While I don’t really care what the results say (near-term results are just noise in the long-term picture), DKS stock will likely drop or pop depending on the numbers.

But here’s the setup: DKS stock is down nearly 10% in just the past week despite no news from the company. Clearly, a lot of bad is priced in. But I think Dick’s had a lot better quarter than what most investors expect.

And it all comes back to size. While Dick’s smaller peers are struggling, the bigger department stores are reporting huge growth in activewear. That is good, because it means consumers are going to bigger stores for activewear. DKS is a bigger store, so that implies consumers are going to DKS more.

Kohl’s Corporation (NYSE:KSS) sounded particularly bullish about their Active business last quarter. The Active business grew in the range of 14%. The big sales jump was driven not only by Under Armour Inc (NYSE:UAA), but by sales increases with Nike Inc (NYSE:NKE) and Adidas AG (ADR) (OTCMKTS:ADDYY) as well. Overall, the read from KSS is that active apparel is a hot seller.

Nordstrom, Inc. (NYSE:JWN) said the same stuff as Kohl’s. JWN management said that their active business was very good in the quarter, as it has been for the past several quarters. Elsewhere, Macy’s Inc (NYSE:M) highlighted active apparel as a strength in their most recent quarter while J C Penney Company Inc (NYSE:JCP) experienced double-digit growth in activewear in the spring season.

Overall, the big department stores painted a very favorable picture of the active apparel business last quarter. Dollars are shifting from accessories and traditional retail to activewear. The net takeaway is that activewear continues to comprise a bigger and bigger piece of the retail pie.

That all bodes favorably for DKS ahead of its next earnings report.

Bottom Line on DKS Stock

DKS stock is trading at just 8.8 times next year’s consensus earnings estimate. That low multiple is despite consistent and stable positive comp growth, projected double-digit earnings growth this year and into the foreseeable future, and a clean balance sheet.

In other words, DKS is being priced as if it were going out of business, but it’s not. The company is actually growing everywhere. And that growth will continue as the sports retail segment continues to consolidate.

It’s only a matter of time before the market realizes this. The multiple will correct upwards, and earnings estimates will likewise come up. That 1-2 punch will cause DKS stock to rally significantly higher from this depressed price.

As of this writing, Luke Lango was long DKS, NKE and KSS.

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