Here's How Dick's Plans to Capitalize on Sports Authority's Bankruptcy

By Markets Fool.com

If vanilla ice cream was no longer available, common logic would suggest chocolate sales would go up.

Continue Reading Below

In the retail world, however, that has not always proven to be true. Sometimes when one major player in a sector dominated by two companies goes away, its surviving rival does not benefit as you would expect. In most cases, that's because the market conditions that drove one company out also impact the other.

In recent years, that explains why the death of Circuit City did not lead to a massive resurgence byBest Buy,nor did the end of Borders Books result in a Barnes & Noblerenaissance. It's possible, maybe even likely, that the deaths of those two major retailers made continued existence possible for the surviving chains, but in both of these cases, it was the emergence of the Internet, not rival bricks-and-mortar stores, that sat at the root of the problem.

That history is perhaps whyDick's Sporting Goods has decided to make strategic moves when it comes to markets being abandoned by bankrupt rivalSports Authority.

Dick's will be looking at whether it should take over some Sports Authority stores. Image source: Dick's.

What is DIck's doing?
It's important to note that unlike Circuit City and Borders, Sports Authority has no plans to close completely. Instead, it's shutting about 140 locations, roughly a third of its stores, as it attempts to reorganize and emerge from bankruptcy. That, however, should still open up some markets for Dick's, and the company is carefully examining the potential opportunity.

Continue Reading Below

Essentially, Dick's plans to look at markets being abandoned by its rival to see if it makes sense to take over leases of shuttered Sports Authority stores. It's also exploring whether it should up its marketing in areas where it already operates, but lost its chief physical competitor, The Pittsburgh Post Gazettereported.

"We want that business to come to us versus somebody else," CEO Edward W. Stack told analysts during the company's Q4 earnings call, which Seeking Alpha transcribed. "We're going to be pretty aggressive, going to try to capture some of that displaced market share that we expect is going to become available.

Will Dick's face the same problems?
Unlike Barnes & Noble and Best Buy, Dick's has benefited from the fact that some of its product lines remain resistant to online competition. Apparel and shoes specifically have been categories where consumers often like physically handling and trying on items. You can also assume that certain athletes -- golfers come to mind -- will always want to touch their equipment before buying it.

That suggests that unlike in books and electronics, where there really is no reason not to buy online, sporting goods may remain a viable bricks-and-mortar category. And, while Best Buy and Barnes & Noble were already struggling when their chief rivals went out, Dick's remains in good shape, according toStack.

"We have a very strong balance sheet, ending the year with over $100 million in cash with no borrowings outstanding at our $1 billion credit facility," he said during the earnings call, continuing:

We returned over $420 million to shareholders through dividends and share repurchases, representing a 9.5% cash yield. We believe we are very well positioned to capitalize on the opportunities we see ahead. It will require some investments and some time to see the returns, but we remain confident in our ability to create substantial long-term value from here.

It's about being careful
As Dick's evaluates each market, it clearly has to look at why Sports Authority chose to shutter that store. In some cases, it will clearly be because demand did not exist, but in others, there will be opportunities for Dick's to take over a location it can operate more profitably than its rival.

However, while this situation does not entirely mirror what online-only retailers did to the book and electronics markets, the sporting good category has certainly been hurt by digital competitors. In this case, losing a competitor may drive new business to surviving stores, and it may justify Dick's entering certain markets that Sports Authority leaves, but the company should tread very lightly.

There is opportunity here because Dick's is not struggling the way Best Buy and Barnes & Noble were when their chief rivals went bankrupt. In this case, Stack should remain cautious, because it's unclear if the digital drain on physical sporting goods stores has leveled off, or if it will grow as new technology makes buying things like sneakers or yoga pants online less risky.

Losing a competitor can be a good thing, but rushing to claim its territory is a risky move when some portion of the entire customer base is moving away from bricks-and-mortar shopping. Basically, if vanilla no longer has to battle chocolate for market share, it still has to remember that the Internet can be strawberry, rum raisin, or basically any other flavor.

The article Here's How Dick's Plans to Capitalize on Sports Authority's Bankruptcy originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. He does not understand why anyone would pay $200 for sneakers that they then try to keep clean. The Motley Fool owns shares of Barnes & Noble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.