Sports retailers have had a tough week. As if Amazon.com, Inc. (NASDAQ:AMZN) launching Prime Wardrobe on Tuesday wasn’t enough, rumors swirled Wednesday morning that Nike Inc (NYSE:NKE) was going to start selling its products on Amazon.com. Sports retail stocks sputtered. Foot Locker, Inc. (NYSE:FL) dropped 5%. So did Hibbett Sports, Inc. (NASDAQ:HIBB), while Dicks Sporting Goods Inc (NYSE:DKS) fell 4%.
Source: Mike Mozart via Flickr
I think the sell-off in the group presents a compelling “buy the dip” opportunity. I’ve already put out a piece on why FL stock looks good here.
DKS stock also looks good for all the same reasons. Both companies have successfully navigated though the retail carnage thus far with largely positive growth in same-store sales and stable gross margins. Nike selling on Amazon.com is a rather minute change in the big picture, so not much should materially change for Dicks or Foot Locker.
That’s why I say buy DKS and FL stock — but especially Dicks stock, because it has an additional catalyst. It might be Amazon’s next acquisition target. Here’s why.
Amazon’s M&A Strategy May Include Buying Segment Leaders like Dicks
Last week’s big story was Amazon acquiring Whole Foods Market, Inc. (NASDAQ:WFM). The acquisition took the market by surprise, and it illustrates that Amazon is looking to fuel growth through M&A.
But why would a high-growth company like Amazon need to acquire smaller companies in order to drive growth?
Well, despite the surging stock price, Amazon’s growth is actually slowing. Amazon’s North America retail growth rate is strong, but it’s not accelerating. It has just been sort of stagnant in the mid-20% range. In international retail, Amazon’s growth rate is really slowing down. Amazon Web Services is also suffering from the law of large numbers, as growth rates are falling there. Overall, Amazon’s growth is materially slowing. Roughly 28% growth last Q1 turned into 23% growth this Q1.
Despite this slowing growth, the stock continues to run up. That means in order for the company to justify the expanding valuation, AMZN is going to have to keep its growth rate up, and one way to do that is to acquire the segment leaders in brick-and-mortar retail and really take control of the whole retail space.
After acquiring Whole Foods, it looks like Amazon is indeed going to grow its business by acquiring brick-and-mortar segment leaders. If that’s true, DKS could very well be AMZN’s next target.
DKS is without question the market leader in the sports retail space. That’s because there really is no competition left. A swarm of bankruptcies has left Dick’s as essentially the last man standing in sports retail. Foot Locker and Finish Line Inc (NASDAQ:FINL) are still alive, but those are niche, footwear-specific players. Hibbett, meanwhile, is tiny compared to Dick’s.
Any way you slice the pie, Dicks controls the brick-and-mortar sports retail world. If AMZN pursues acquiring retail segment leaders, then DKS would be at the top of their list given its unparalleled position.
Groceries First … Sports Second?
Although I don’t think such an acquisition will happen so soon after the WFM deal, I also don’t think a potential Dicks acquisition is that far off in the future either.
An important observation here is that Amazon has dabbled in selling groceries before. AmazonFresh, the company’s grocery delivery service, has been a multiyear project for Amazon. Its success has been limited. Turns out consumers like shopping at traditional grocery stores.
So instead of continuing to compete head-on, Amazon went and bought a premiere grocery chain. With it, Amazon will be able to spread the benefits of its Prime ecosystem throughout the grocery world.
Amazon has also dabbled in selling sportswear before, and now all the pieces seem to be in place for AMZN to make serious advances in sports retail. The company has toyed with the idea of launching its own athletic apparel line. Nike will soon start selling products through Amazon.com. Prime Wardrobe is a perfect fit for athletic apparel, where fit and comfort are everything.
The sports retail storyline for Amazon looks very similar to the grocery storyline. If those similarities continue, the next thing in store for Amazon in the sports retail space is an acquisition.
Bottom Line on DKS Stock
DKS stock is dirt cheap here. Growth is good, the balance sheet is strong, the dividend is safe, and cash flows are healthy.
On those merits alone, DKS stock is a buy. But with a potential AMZN acquisition on the table, I think Dicks offers a lot of upside with considerable downside protection.
I am a buyer on this dip.
As of this writing, Luke Lango was long DKS, FL, AMZN, FINL and NKE.
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