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Why Dick's Sporting Goods Is an Underrated Stock

Although Dick's Sporting Goods Inc.'s (NYSE:DKS) 3% rise over the past year is in line with the S&P 500's performance, the sports retailer could outperform the index in the long run.

Its online strategy, the increasing size of its competitive advantage and the improvements it is making to its stores suggest its share price undervalues its growth potential.

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Online growth

The company is heavily investing in its e-commerce operations following 21% growth in online sales in the second quarter. It plans to launch a new version of its website in 2020 that should result in reduced load times for online customers. This could improve its customer engagement levels and lead to rising sales through higher conversion rates across its customer base.

Dick's Sporting Goods is continuing to expand its fulfilment capabilities. For example, in the second quarter, it opened two new dedicated e-commerce fulfilment centers and agreed to a strategic delivery partnership with FedEx (FDX). This should reduce delivery times to its customers by one day for most orders, as well as reduce the cost of delivery.

Economic moat

The company's loyalty program could increase the size of its economic moat. Dick's plans to launch an enhanced tier of membership within its"'Scorecard" loyalty program, which will provide its members with benefits like early access to sales, VIP events and greater opportunities to earn points when shopping in-store and online. Since the retailer's loyalty program members account for 70% of total sales, offering them greater rewards should strengthen its competitive advantage.

The launch of Dick's Sporting Goods' latest private brand, DSG, in the second quarter should further differentiate the business from its sector peers. Its private brands also provide the potential for it to generate higher margins and capitalize on cross-selling opportunities.

Store organization

The company expects to see a positive sales boost following its decision to remove the hunt category from 125 of its stores. After successful tests in 10 of its stores in 2018, Dick's is replacing hunting products with a localized assortment of goods.

The retailer increased its inventory levels by 19% in the second quarter when compared to the prior-year period. This allows it to stock a wider range of goods as well as showcase its products in a more significant manner. This could enhance its comparable sales growth over the medium term.

Possible risks

Even though the University of Michigan consumer sentiment index rose to 92 in September from a three-year low of 89.8 in August, it continues to suggest U.S. consumers are pessimistic about the economy. According to the index's results for September, 38% of consumers said they were concerned about the possible impact of tariffs. This is the highest percentage since March 2018 and suggests the prospect of continued trade uncertainty may negatively impact consumer spending levels. This could mean the retail sector experiences a period of slower demand growth.

Dick's could offset a potential slowdown in sales growth through its productivity program. Management confirmed the retailer is on track to reduce expenses by $30 million in 2020. In addition, it is increasing the level of training it provides staff members, which should improve its customer conversion rates and may provide greater scope for cross-selling opportunities.

Outlook

According to analysts' projections, Dick's Sporting Goods is expected to record a 3% increase in earnings per share in 2020, followed by 4% growth in 2021. Since it has a price-earnings ratio of 11, the stock seems to offer good value for money.

Disclosure: The author has no positions in any stocks mentioned.

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This article first appeared on GuruFocus.