Summary
Shares of DKS look undervalued as the company has demonstrated competency in several areas to carve out an attractive niche.
E-commerce, premium product, smart inventory management, and capital allocation are the key drivers.
Shares are worth $40-50.
Shares of Dick’s Sporting Goods (DKS) continue to sit well below their 2017 high, but the stock has done well in 2018, up 26% year-to-date as the company recovers from a highly promotional H2’17. In my view, the company is checking virtually all the boxes that ensure survival as an omnichannel retailer heading into the next decade, and I am increasing my fair value range to $40-50 based on continued execution. At the low end of my fair value range, shares would trade at just 12.5x 2018 earnings –a significant discount to the broader market. With strength again in e-commerce, the ability to identify necessary business model changes, disciplined inventory management, and strong capital allocation, shares look attractive at their current level.
Key #1: E-Commerce
E-commerce growth was terrific in Q1, up 24% y/y, and the strength continued in DKS’s most recent quarter, with e-commerce sales up 12% y/y, up to 11% of sales. Penetration of e-commerce sits at 11% YTD, and the company is still in the early stages of figuring out the omnichannel model. Unlike some of its competitors, e.g. Foot Locker (FL) and Nike (NKE), DKS has not invested as much in its e-commerce business in recent years. DKS lacks the same promotional cadence as its competitors, but I see the company improving with more promotions like flash sales and usage of referral companies like eBates. With the decision to exit firearm sales, I think we could see this business hit 15% of total sales in FY19.
