If college and professional sports cancel their seasons for the rest of the year, the recovery from the coronavirus pandemic Dick's Sporting Goods (NYSE: DKS) is attempting may falter.
Although the number of direct dollars at risk is relatively small in relation to the retailer's total annual revenue, team sports are a significant driver of sales throughout its stores, and the effect could be as bad as when Dick's decided to abandon the firearms market and remove the category entirely from its chain.
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Ivy League universities just canceled their fall sports programs, which could start the dominoes falling in other conferences.
Although the Big Ten conference announced it was limiting fall games to just conference-only competition, dramatically reducing the number of games that will be played, and the Pac-12 conference said it would do the same, as more cases of coronavirus arise, they could change their minds.
Former National Basketball Association coach and current Iona College coach Rick Pitino thinks the National Collegiate Athletic Association should delay college basketball's start until January.
Major league bummer
Pro sports is a similar mixed bag. Major League Baseball, for example, will begin a shortened 60-game season on July 24 (there are usually 162 games), but only for intra-division play. And a number of individual players have chosen to sit out the season.
The National Football League says teams can start their training camps at the end of the month, but it will come down to whether individual states allow play to begin. Fans are also not likely to be allowed into stadiums, and Los Angeles Rams head coach Sean McVay seemed incredulous: "I mean, we're going to social distance, but we play football?" he told the Los Angeles Times.
And let's not forget that high school sports are probably shot for the year too, as it's uncertain whether there will even be school in many districts in the fall.
A crimson tide for sales
Cancellation or even delayed starts to sports seasons at whatever level could wreak havoc with Dick's Sporting Goods' performance, though at first glance it may not seem so bad.
Morgan Stanley analyst Simeon Gutman estimates team sports and licensed apparel represent between 5% and 10% of annual sales, or about $500 million to $900 million. Of that, fall team sports revenue represents about 10% of hardline revenue and fall licensed merchandise about 10% of apparel.
Since Dick's reported hardlines accounted for 42% of its $8.8 billion in annual sales, or $3.7 billion, while apparel accounted for another 35%, or $3.1 billion, that means about $70 million is directly at risk, or less than 1% of the total. That's why Gutman isn't especially concerned about delays or cancellations of sports seasons.
Yet the problem is that Dick's has relied on team sports and licensed apparel to boost sales elsewhere in its stores. It was also this segment that was given a priority to make up for the loss caused by removing the hunting business from its stores.
Moreover, they're closely aligned with Dick's footwear business, which represents another 25% of revenue. While it has added more of a fashion aspect to that component, the core athlete remains the main focus.
A sport for every season
In last year's second quarter, baseball was a significant contributor to Dick's growth as it outpaced the company average, and in the third quarter it was football that helped carry team sports higher. It rounded out the year with an equally strong performance in all of these key categories, validating Dick's push to become an all-seasons retailer. Removing the important fall season would hurt.
Because team sports, athletic footwear, and athletic apparel are all entwined into its broader business -- and also all carry higher margins than hunting did, so their lack of contribution could also drive margins down more significantly -- there may be a much bigger effect than Wall Street is anticipating.
A sporting chance
Dick's Sporting Goods isn't going to go under because basketball or football is delayed or canceled, but it will stretch out the timeline for when investors can expect it to regain its footing.
However, with shares of the sporting goods retailer's stock trading for 11 times next year's earnings estimates and 12 times the free cash flow it produces, Dick's looks like an intriguing discounted stock. As long as you don't expect it to hit it out of the park again anytime soon, an investment at these levels, particularly if a truncated sports season drives the stock down more, would still likely be a home run.
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