Dick's Sporting Goods Inc -- Best in Class but in a Shrinking Industry

By Motley Fool Staff Markets Fool.com

In thisMarket Foolerysegment, Chris Hill is joined by Bill Barker fromMotley Fool Fundsas they cover the state of brick-and-mortar sporting goods retailers with the latest results from Dick's Sporting Goods (NYSE: DKS).

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The bankruptcy of major competitors means it is now the only remaining chain with a nationwide footprint, but a weaker outlook worried investors. What does it mean to be the industry leader when you are competing against all of e-commerce?

A full transcript follows the video.

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Chris Hill: Let's move on to Dick's Sporting Goods.

Fourth quarter profits came in higher than expected. Same store sales were up 5%, which given the retailers that we've talked about over the last few weeks, plenty of retailers would kill to have those kind of comps. This is a good quarter, but shares down, because once again, the guidance trumps the actual results.

Bill Barker:It always does,almost always.

Hill:That's got to be a little frustrating, don't you think? Just a little bit? If you ran a public company, and you put up the kind of quarters that Dick's Sporting Goods just did, and you came out and said, "Look, we're going to be straight with you, here's what our guidance is," and people said, "Ugh, fine, we're out of here." Like, we get nothing?! We get no credit for what we just put up in a really tough retail environment? Did we mention we're a bricks and mortar retailer?

Barker:Yeah,and I think that's something they'd hope to not mention. Investors are kind of poised for any weakness. And as strong as Dick's numbers are, remember that one of the reasons same store sales were up this much this quarter is because Sports Authority and Golfsmith are no longer around. So they have had the benefit ofsignificantly less competition. Dick's is really the only national sports retailer with a full national footprint and an online presence. And yet, they're going to continue to compete againstAmazonand probably some more of their competitors, smaller names will continue to go away. You have to balance out, what is the value of being the No. 1 retailer when you're anchored to malls -- in a lot of cases, not all of them for Dick's, but they're in, if not malls, then retail conglomerations. And being the best in that group today is not valued very highly. They're trading at about 11 times forward earnings, which is pretty cheap in this market. But I think there isn't a lot of enthusiasm for, really, anybody in the retail space.

Hill:But if you'reNike, if you're running Nike, if you're runningUnder Armour, don't you want Dick's Sporting Goods to succeed? Aren't you doing what you can? We saw what happened, certainly, to Under Armour when Sports Authority went down, and the effect that that had on not only their inventory but their bottom line as well.

Barker:Yeah. You do want to. There's only so much you can control. Under Armour is, in its own small way, a competitor because it has its retail stores. Certainly, you want there to be more outlets selling your goods. Dick's is, so far, doing better than all the competition other than Amazon. But there's just less foot traffic. I think they've done a really good job to get the comp numbers they've had. Those are so much better than a lot of the other numbers that you're seeing in retail in the last quarter. But again, that's because there's no Sports Authority to go to in a lot of cases.

Hill:I'm just trying to imagine -- and they're not in the precarious financial position that Sports Authority was -- but if Dick's Sporting Goods just up and goes away, I'm trying to imagine what theretail landscape looks like then, because Nike and Under Armour haven't built up their e-commerce to the point where they can handle that kind of blip.

Barker:Yeah. I don't think we want to imply that that is somewhere that's anywhere on the horizon right now. Dick's has growing sales. Their sales are not going away. They're just not translating into ever-increasing earnings per share for shareholders. They are up to about $3 a share, and they were about $2.75 three years ago. So, earnings per share have gone up about 10% in the last three years. That's pretty good in retail. But that's not the kind of growth that you can find in a lot of other placesin the market, 2% to 3% per share growth and a little bit of a dividend, maybe. But I think their sales have gone up more than their profits. And you have to look at that and say, that's got to do with pricing competition, and there's no real brand strength. They're either getting people to come into the store just because they're already at the mall or it's a destination. But they can't really charge more, just like every other retailer, they have to compete against a very competitive Amazon who is not looking to make the highest margin it can on every sale. Not yet, anyway.

Bill Barker has no position in any stocks mentioned. Chris Hill owns shares of Amazon and Under Armour (C Shares). The Motley Fool owns shares of and recommends Amazon, Nike, and Under Armour (C Shares). The Motley Fool has a disclosure policy.