EUR 850.00 For Business Accounts Only

Morningstar | Despite Store Openings, No-Moat Dick's Has Faltered as Alternatives Abound, but Shares Attractive

We maintain our no-moat rating on Dick’s Sporting Goods but raise our fair value estimate to $43 per share from $40. We now view the shares as attractive and believe investors are too focused on recent results (negative 3.2% same-store sales in 2018). While competition has made Dick’s stores less productive, we forecast its same-store sales will turn positive this year on the strength of popular activewear and store improvements. Further, we think the firm is doing well with e-commerce and private-label merchandise. Dick’s e-commerce increased to nearly $1.3 billion in 2018 from $292 million in 2012, and we expect it will reach $2 billion by 2022. We forecast private label will constitute 28% of Dick’s sales in 2028, up from 14% in 2018. We also think Dick’s will slow store openings, allowing for reduced capital expenditures. Thus, we have raised our forecast of free cash flow over the next decade to $3.5 billion from $3.0 billion. As Dick’s has minimal debt, we expect it will return most of its free cash flow to shareholders.

Even though we think the shares currently present a favorable risk/reward opportunity for investors, we still believe Dick's has failed to carve out a competitive edge. For one, we believe it is weakened by its large store base of more than 850 stores. Dick’s faces competition from e-commerce, mass retailers, specialty stores, and branded stores and owned e-commerce from vendors. We view the last channels as especially problematic. While Dick’s gets some exclusive product, wide-moat Nike and others are investing heavily in direct-to-consumer channels and making product available that is not available to retailers. We do not think Dick’s can prevent vendors from selling through other channels, either. No-moat Kohl’s, for example, is actively expanding its selection of activewear. Further, we do not think Dick’s has pricing power; in fact, it offers to match competitors’ prices.

We have lowered our stewardship rating to Poor from Standard. Dick's has produced a five-year average annual shareholder return of negative 5%, far short of the five-year annual return of 23% for specialty retailers. We consider CEO Edward Stack’s voting control as unfavorable as we prefer shareholders have equal voting rights. Dick’s long-term strategies have produced disappointing results, suggesting a need for better oversight of management by the board.