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Why Dick's Sporting Goods Has Investment Appeal

- By Robert Stephens, CFA

Strategy changes being implemented by Dick's Sporting Goods Inc. (DKS) could catalyze its financial performance in the long run. The company is aiming to enhance the customer experience, while delivering improved innovation in its private brands. In addition, a greater focus on e-commerce could lead to higher sales as well as a stronger competitive position.


Although the retailer is expected to experience falling sales and margins in the near term, it has an efficiency strategy that could lead to greater financial flexibility. Its low valuation suggests that after matching the S&P 500's 2% rise in the last year, it could offer an improving investment outlook for the long term.

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Customer experience

An improved customer experience is a key focus for Dick's Sporting Goods as it seeks to strengthen its competitive advantage. It is testing a range of initiatives in an effort to improve the in-store experience, including the reallocation of floor space and the optimization of its inventory.

Dick's Sporting Goods will change how it showcases key items within its stores. This is expected to provide customers with a clearer view of higher-margin items. The company is also expanding the testing of HitTrax technology and batting cages within stores after strong customer engagement. This is expected to dovetail with its GameChanger app, which could make the retailer a more obvious destination for baseball enthusiasts.

The company also plans to remove guns and ammunition from 125 stores during fiscal 2019. This decision follows an experiment in the third quarter, where these products were removed from 10 stores.

Evolving strategy

The retailer will continue to invest in its e-commerce division, with the segment delivering 17% growth in the most recent quarter. It is hoping to improve its delivery reliability in order to boost online sales. To achieve this, it is investing in two new e-commerce fulfillment centers. They are expected to allow the company to deliver the majority of its online orders within two business days, which could enhance its appeal among consumers.

Private brands could help to differentiate Dick's Sporting Goods from its peers. The brands recorded double-digit sales growth in fiscal 2018, and help to provide a degree of exclusivity versus industry rivals. The company plans to expand the availability of its CALIA private brand to around 80 stores, as well as launch a new athletic apparel brand. Further investment in its product development team is expected to lead to a stronger focus on product innovation.

Risks

The performance of Dick's Sporting Goods in the most recent quarter was disappointing. Consolidated same-store sales decreased 2.2%, while consolidated sales declined 2.6% from the prior-year quarter. The company's gross profit margin declined 168 basis points as a result of higher shipping, fulfillment and freight costs.

In response to a challenging near-term financial outlook, the retailer is seeking to improve productivity. It is aiming to eliminate unnecessary spending across all areas of the business. It expects to match the $30 million in cost savings made in fiscal 2018 in the current year. Those savings will be reinvested to help offset the strategic growth investments that are being made.

Outlook

The company is forecasting a rise in earnings per share of less than 1% in fiscal 2019, followed by growth of 3% in fiscal 2020. While this is a low rate of growth, its price-earnings ratio of 11 suggests it could offer a margin of safety.

The changes being made to Dick's business model may enhance its long-term growth outlook. Investments in e-commerce and private brand innovation could boost sales growth. An improved customer experience may enhance its competitive position and increase engagement levels.

While the near-term prospects for the business may disappoint, its long-term strategy could lead to a rising stock price. This could enable it to outperform the S&P 500 after its modest capital growth over the last 12 months.

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This article first appeared on GuruFocus.