Dick’s (DKS, Financial) share price has seen a good run-up this year, gaining over 60% year to date. Many investors are wondering if there is more upside or if should they be cautious at these levels. Given the company’s market share gain and store growth prospects, I believe the stock can see further upside. Here is a look at the company in detail.
Dick's Sporting Goods is a full-line sports and fitness retailer offering a broad assortment of high quality, competitively priced brand name sporting goods equipment, apparel and footwear in a specialty store environment. The company also owns and operates Golf Galaxy LLC, a golf specialty retailer.
Dick’s is poised to capture a significant amount of the displaced market share post the bankruptcy of competitors The Sports Authority and Sport Chalet. In addition to less competition and better bargaining power with vendors, Dick’s will also benefit from its purchase of Sports Authority's intellectual property (including customer information) and the right to acquire 31 store leases. The customer information will help Dick’s efforts to capture the displaced market share, while the rights for stores leases will allow it to access key markets like California and South Florida that represent significant white space opportunity. Further, the lease deal was structured with maximum flexibility, allowing Dick’s the right to retain or reject any or all of these leases. Dick’s plan is to convert any Sports Authority location it retains into a Dick’s store and the company expects to reopen these stores over the next 12 months.
The company’s market share gain opportunity is being noticed by sell-side. Wedbush analyst Christopher Svezia recently initiated coverage on the company with an outperform rating. According to him, there is a $1 billion sales opportunity for the company and 20% to 25% flow-through from these sales. The company could generate $1.25 in incremental EPS. Svezia believes the market is underestimating the potential benefits. In his research note, he wrote:
"It is no secret that while DKS will likely be the largest beneficiary to TSA’s demise, we believe the Street is still broadly underestimating the potential benefit over the next 18-24 months. In addition, the absence of a major competitor will likely mean that DKS gains leverage with its vendors in terms of product allocation and capital investment."
There is also a meaningful growth opportunity in Dick’s digital business through the investment its key partners such as Nike, Under Armour and the North Face are making with Dick’s to enhance the consumer experience both in-store and online. The company’s ecommerce sales are growing in the mid-20s and now account for approximately 9% of the company’s sales.
The company is undergoing fast expansion and its store count has increased from 561 in the begining of fiscal 2012 to 741 at the end of fiscal 2015. The company plans to open 47 new stores in fiscal 2016.
In addition to high growth prospects, management is showing strong commitment to returning capital to shareholders. The company has repurchased over $527 million of stock since the beginning of 2015. The company has a dividend yield of 1%.
The company's EPS forecast for the current fiscal year is $3.05 and $3.72 is predicted for next year. According to the consensus estimates, its top line is expected to grow 7.80% in the current year and 9.20% next year. Out of 30 analysts covering the company, 18 are positive and have buy recommendations, while12 have hold ratings. The company is trading at 15.67x forward price-earnings, making it a good GARP (growth at a reasonable price) stock to have in your portfolio.
Disclosure: I have no positions in any stock discussed in this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
