Dick’s Sporting Goods Inc (DKS, Financial) offers capital growth potential, in my view, after its 53% stock price fall in the past year.
The sporting goods retail chain is improving its store layout, investing in its website and seeking to reduce costs.
Store investment
The company made changes to its store layout and product displays in its fiscal 2019 fourth quarter. For example, it allocated additional floor space in its stores to products that are relatively popular among its customers. This helps to make its stores more relevant to their local community.
The retailer continued to remove hunting-related products from its stores in the fourth quarter. It now no longer sells hunting products in 135 of its stores, and has replaced them with other products that have proved to be more popular with its customers. It plans to continue this process and expects hunting-related products to be on sale in just 12% of its stores by the end of the first half of fiscal 2020.
In addition, Dick’s Sporting Goods plans to increase its range of golf and soccer products in 2020. They have resonated with its customers, according to its fourth quarter results.
Website growth opportunities
The retailer expanded its “buy online, pickup in store” service to its specialist golf stores in the fourth quarter. This contributed to the service producing a 30% growth in sales in the fourth quarter compared to the same quarter of the previous year.
Dick’s Sporting Goods opened two new e-commerce fulfilment centers in 2019. They have helped to reduce the amount of time it takes to ship the company’s products to its online customers.
The company plans to improve its website in fiscal 2020. It plans to customize its website to different geographies and locations so that it is more relevant to its customer base. It will also further expand its “buy online, pickup in store” service and offer more accurate delivery dates for its e-commerce sales.
Potential difficulties
The company announced that its stores will close for two weeks from March 18 in response to the Covid-19 pandemic. It had reported large declines in the number of customers visiting its stores. This means that its sales performance in the near term could be disappointing. Even though its website is open for business, many of its customers may postpone their purchases due to restrictions on movement that are currently in place.
In addition, a weak economic outlook may lead to reduced demand for the company’s products in upcoming quarters as the full impact of economic downturn becomes clear.
Dick’s Sporting Goods is attempting to offset a fall in its sales through reducing its costs. In the fourth quarter, it eliminated over $44 million in expenses across its business. Its cost reductions contributed to an increase in the company's gross profit margin of 0.4 percentage points in the fourth quarter. This may further support the company's interest coverage ratio, which stood at a healthy 22.1 in 2019.
It also plans to increase its differentiation versus sector peers through the release of private brands. For example, it launched a new private brand in 2019 called DSG. The retailer expects DSG to become its largest private brand by the end of 2020. The brand could strengthen its market position, and improve its profitability.
Outlook
Market analysts forecast that the business will report a 7% rise in its earnings per share in 2020, followed by growth of 11% in 2021. Its price-earnings ratio of 5 suggests that it offers a wide margin of safety.
Disclosure: The author has no position in any stocks mentioned.
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