thinking about retail: Dicks Sporting Goods (DKS)

DKS reported disappointing earnings Monday night.  Its stock dropped by 23% in Tuesday trading.  So far this year it has lost 49% of its value, in a market that’s up by 10%.  …this in spite of the bankruptcies of rivals Sports Authority and Gander Mountain, which should arguably have cleared the way for better results.

The obvious culprit here is Amazon (AMZN).

I’m sure that AMZN is a factor.  On the other hand, although AMZN is growing at 4x the +5% rate of annual expansion of sporting goods sales in the US, the online giant represents only about 4% of the total sporting goods market.  DKS alone is 50% bigger–and its bricks-and-mortar competition has shrunk considerably.  So online can’t be the whole story.

I think two other general factors are involved:

–Millennials vs. Boomers, with DKS, to my mind, clearly oriented toward Baby Boomers’ tastes.  This issue here is that although Boomers have more money than Millennials, their star is waning as Millennials’ is rising.

–a “normal” business cycle.  During most time periods and in most parts of the world, in my experience, consumers are constrained in their buying by the limits of their income.  As new households form and families rent/buy a residence, rent/mortgage and, sooner or later, things like furniture become significant purchase categories.  This means less money for other purchases–like new golf clubs.

From the late 1990s through 2007, however, that wasn’t the case. Universal availability of home equity loans enabled consumers to avoid budgeting and prioritizing purchases.  So the typical pattern of contraction in some retail categories while housing-related, expands was absent for an extended period.

Now it’s back.  My sense is Wall Street has yet to catch on.

As an investor, I’m not particularly interested in the sporting goods category.  But I think the pattern I see here isn’t an isolated phenomenon.  If I’m correct, we should be doubly careful of any traditional retailer.



2 responses

  1. If sporting goods sales are growing at 5% a year, then how do constraints on consumer spending explain Dick’s performance?

  2. Good point. What I probably should have written is that I think consumers are being more thoughtful in their discretionary spending post-recession …and that the more thought they give to sporting goods, the less likely they are to go to a store that sells the plain-vanilla (or less than that) merchandise I perceive DKS as offering.

    As to DKS performance, 2Q17 sales were up by 9.6% year on year and amounted to a 0.1% same store sales gain. Both the company and Wall Street had much higher expectations at the beginning of the year, which DKS has subsequently walked back at least once before this. I think the general idea was that without Sports Authority and, to a lesser extent, Gander Mountain, DKS’s same store sales growth should be accelerating rather than decelerating.

    Sporting goods store sales grew by about 8% per year in the 1990s and from 2003-08, but the industry has been unable to approach that rate during the current recovery.

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