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Stock Strategist

Growth Game's Not Over for This Sporting Goods Retailer

Dick's has steadily improved returns in a competitive industry.


 Dick's Sporting Goods (DKS) has slowly but steadily improved operating margins and returns on capital since its initial public offering, and we expect further improvement. In what we consider a fragmented and competitive industry, Dick's has emerged as a best-in-class operator, and one of only two competitors that has U.S. national coverage. We believe its growth and profitability improvement potential have not been exhausted, as there are still markets not fully penetrated, the competition remains fragmented, and operating margins leverage with scale. Yet because of seasonal and cyclical issues in two product categories, Dick's shares trade at a discount to our fair value estimate.

Dick's Sporting Goods has grown from less than 300 stores in 2006 to more than 560 Dick's branded full-line sporting goods stores and 84 Golf Galaxy golf specialty stores today. Its revenue has grown from just over $2.1 billion in 2004 to a projected $6.8 billion in the year ending January 2015, representing a 14.7% compound annual growth rate. Even with this consistent and lengthy growth trajectory, the firm only began penetrating markets west of the Mississippi in 2008, and we believe there is still white space for Dick's to fill in stores, particularly in the Western United States. Despite its growth rate, we calculate that Dick's market share has only approached 11%. Typically, smaller stores and retailers that aren't sporting goods specialists are the share losers when Dick's enters a market. After the financial crisis of 2008-09, obtaining suitable commercial real estate appeared to be an issue, but we believe today the environment has improved enough to make management's 2017 goals of more than 800 Dick's stores and nearly 90 Golf Galaxy stores very achievable.

Paul Swinand does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.