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Morningstar | Competition Means Store Growth Hasn’t Brought Profit Growth for No-Moat Dick’s Sporting Goods

We believe no-moat Dick’s Sporting Goods is struggling to stay relevant as sporting goods are sold through an increasing number of channels. While Dick’s is the largest general sporting goods chain in the United States, growth in the sector is minimal due to external competition. Sporting goods retail, according to IBISWorld, experienced average annual growth of just 1.3% over the past five years. Competitors include e-commerce operators like wide-moat Amazon, mass retailers like wide-moat Walmart, specialty stores like those of narrow-moat Lululemon and Bass Pro Shops/Cabela’s, and branded stores and owned e-commerce from major vendors. We estimate, for example, that direct-to-consumer will constitute 31% of narrow-moat Adidas’ 2019 sales. We do not think Dick’s market position is strong enough to prevent vendors from offering their merchandise in alternate channels.We think Dick’s recent strategy has not worked as its aggressive store expansion has not brought profits. In 2013, Dick’s forecast its operating margin would increase to 10.5% by 2017 from 9.0% in 2012, but its actual operating margins were below 6% in each of the last three years. Although e-commerce has been a bright spot (with sales growing to $1.3 billion in 2018 from $500 million in 2013), we think Dick’s large base of more than 700 full-line stores and another 130 specialty stores limits its flexibility. Dick’s recent same-store sales have been poor (negative 0.3% in 2017 and negative 3.2% in 2018), and transactions have declined in five of the past eight years. Dick’s sales per square foot dropped to $167 in 2018 from $193 in 2012 despite $2.3 billion in total capital expenditures over the span. Dick’s investments in new full-line and specialty stores have failed to attract enough new customers. We forecast same-store sales growth between 0.5% and 1.1% over the next decade and average annual sales growth of just 1.2%. We expect Dick’s to fall short of U.S. activewear growth of 3%-5% as store traffic weakens and it cedes market share to competitors. Further, we do not forecast any margin improvement from the 5.3% operating margin reported in 2018 due to a lack of pricing power.