Buying Direct Will Have a Negative Impact on this Retailer

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It used to be that when you needed sporting goods, apparel or footwear, you would go to your nearest sporting goods store and browse its inventory before deciding what you wanted. Today it's different. Companies like Nike and Under Armour have such strong brands and loyalty that customers already know what they want. The end result is that they can buy directly from Nike or Under Armour without having to go to their local sporting goods store. This trend is bad news for companies like Dick's Sporting Goods .

The top sportswear and apparel company
Nike remains the top dog in the sportswear and athletic footwear market worldwide. To remain the top dog, Nike continues to innovate and expand its product offerings. One area where Nike looks to get ahead of its competition is in wearable devices. Nike's new Fuelband SE is an update of its original Fuelband with some major improvements.

What I like about the new Fuelband SE is that it has Bluetooth 4.0, which allows it to be synced with the Fuelband app on iPhone or Android. The device comes with smarter motion sensors that improve fitness tracking. Nike is going to sell the device for $149, and it hits shelves in November.

At Nike's 2013 Investor Meeting, CEO Mark Parker was very optimistic about the company's prospects going forward. Nike forecasts strong sales gains in apparel, its women's line, and e-commerce. By 2017, apparel sales are forecast to grow from $7.5 billion to $10 billion. Its women's business is expected to almost double to $7 billion from $4 billion. E-commerce sales are forecast to grow to $2 billion, and total sales are forecast to grow to $36 billion by 2017.

Still a lot of armour in this company
While smaller than Nike, Under Armour has made great progress in the sportswear and apparel market. Under Armour just reported earnings that came in $0.02 better than expectations. Revenue grew 26% Y/Y. Net income grew 27% compared to the third quarter of last year. Under Armour is still growing rapidly, and for the full year, the company expects total revenues to grow 26% compared to last year.

To continue its growth, Under Armour has several initiatives in place. For one, the company is shaking up its management ranks; COO Kip Fulks is taking on more duties and the company named a new President of North America. Second, Under Armour is making a push into China with a new concept store in Shanghai. I see international markets having tremendous potential for Under Armour, as international sales account for only about 10% of the company's total sales. In addition, the company launched new e-commerce platforms in Hong Kong and Taiwan, as well as new offices in Brazil and Chile.

In many ways, Under Armour is copying the pages from Nike's playbook. The company has endorsement deals with several notable athletes, including Michael Phelps, Bryce Harper and Cam Newton. In addition, Under Armour is now in the athletic shoe business, and its shoes are catching on with a younger generation.

Why shop at Dick's?
While apparel sales are important for Dick's Sporting Goods, the company has actually been seeing most of its growth from hunting, driven by sales of firearms and ammunition. Apparel and athletic footwear also still represents a big portion of sales, where you have consumers that wish to try on items before purchasing them and this remains a strong suit for Dick's. However, in the second quarter this was not enough, as comparable store sales decreased 0.4%.

Dick's also saw weakness in its Golf Galaxy division. Poor weather in many of its markets kept golfers off the links. The poor weather also affected its fitness business because less outdoor equipment was purchased. These were the primary drivers for the company's disappointing comparable sales.

Going forward, it does look like growth is indeed slowing for Dick's. Last year, comparable sales rose 4.3%. This year, the company forecasts overall comparable store sales to come in flat, to possibly 1% higher. While the forecast isn't negative, I can make the argument that Dick's forward P/E multiple of 16 and EV/EBITDA of 9.5 has the company fully valued.

Foolish assessment
While I like shopping at Dick's stores, I just feel that the growth is no longer there. Even though Dick's has an online presence, I feel that more consumers are going to be purchasing their apparel needs directly from Nike and Under Armour. While Dick's does have the Nike and Under Armour shop-within-a-shops at its stores, consumer shopping preferences are changing, and many prefer buying direct from the source. I see this having a much greater impact on Dick's over the long run.

Both Nike and Under Armour are continuing to innovate, and there remains tremendous growth for both companies overseas. Populations are growing much faster overseas, particularly in Asia, and the demand is there for sportswear and apparel worn by people's favorite athletes. Both companies are growing in the double-digits, and I see that trend continuing.

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The article Buying Direct Will Have a Negative Impact on this Retailer originally appeared on

Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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