This Sports Retailer Has the Most to Gain and the Least to Lose
The sports-retail industry is a rather slow-growing business, one where consistent strength is difficult to achieve. With that said, third-quarter earnings show that Dick's Sporting Goods is the strongest performing company to date, but does that mean it's a better investment than Big 5 Sporting Goods or Hibbett Sports ?
A review of sports retailers
The sports-retail space is not very fragmented but rather controlled by certain companies, including Dick's, Hibbett, and Big 5. Over the last five years, all of these companies have seen their valuations increase by more than 350%, with both Dick's and Hibbett being consistent performers.
On the other hand, the majority of Big 5's gains have come since June 2012, and those gains have come as a result of rapid market-share gains and improved profitability. There is perhaps no better example of Big 5's improved performance than its second quarter of 2013.
In that quarter, same-store sales rose 4.4% year-over-year and net income increased a whopping 135%, thus showing major margin improvements. This performance was far better than the industry's largest company, Dick's, which saw same-store sales rise 1.2% and its margins decline in the same period. Hibbett, the industry's most effective company, saw near-flat same-store sales growth along with a 9% decline in profit.
Hence, Big 5 has been the fastest growing company in the space, which is evident by the stock's gains.
A new investment of choice?
Clearly, Big 5 has been the best investment option for the better part of two years. During this period, Big 5's revenue and margin growth has trumped its peers. However, in this most-recent (third) quarter, we saw a change, as Dick's exhibited stronger growth.
In the quarter, Dick's saw its total sales rise 6.7%, driven by same-store sales growth of 3.3%. Big 5's sales grew 2.9% while its same-store sales slowed to a gain of only 1.4%; Hibbett has yet to report earnings.
So, investors have to wonder if this slowdown in Big 5's growth indicates that its rally might be over, and if Dick's (or Hibbett) is now the investment of choice.
Valuation tells all
To answer this question, investors should turn to the companies' valuation, and understand that Big 5's days of explosive growth might be numbered; Big 5's performance might now be more reminiscent of its peers. With that said, take a look at the chart below:
Dick's | Hibbett | Big 5 | |
|---|---|---|---|
Market Cap | $6.96 billion | $1.63 billion | $405 million |
Forward P/E Ratio | 17.9 | 20 | 12.3 |
PEG Ratio | 1.33 | 1.42 | 0.79 |
Price/Sales | 1.16 | 1.93 | 0.41 |
Price/Operating Cash-Flow | 23.4 | 23.3 | 11.2 |
Operating Margin | 8.78% | 13.83% | 4.51% |
Above, you shall find key metrics used by retail investors to identify value, and immediately, it is clear that Big 5 is without question the cheapest of the bunch.
One intriguing fact regarding the metrics above is that Big 5 is so much cheaper relative to future earnings and to its PEG ratio, yet has a significantly lower operating margin. Some might view a lower operating margin as troublesome, but it also gives the company more room to improve.
For example, despite Dick's strong third-quarter growth, its net income still declined 0.3%. The reason is because of aggressive discounting across all retail industries, and high single- or low double-digit margins are becoming difficult to maintain. However, 4.5% leaves room for improvement, and is why Big 5 saw 12% net income growth in the third quarter despite significantly slower sales growth.
As for Hibbett, it is the most expensive stock in all categories, mainly because of its high margins. However, if low margins are a positive due to heavy discounting, then high margins present risk. This logic was put on display in Hibbett's last quarter, where total sales actually grew 2.5% but net income fell 9%.
If you are looking to invest in this space, Hibbett's pricey valuation and downside margin pressure must be considered, as should Big 5's value and upside potential.
Final thoughts
The bottom line is that if you want to invest in the sports-retail space, then you must realize it's a volatile industry where individual company performance is a bit unpredictable from quarter to quarter. With that said, the strength of any investment is determined based on its upside potential, which can be found by comparing a company to its peers.
In terms of operational performance, all three seem to be on the same page, or have equal growth opportunities. However, a closer look at valuation reveals that Big 5 is clearly the stock with the most to gain and the least to lose.
Another top pick from the Motley Fool. It's FREE!
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!
The article This Sports Retailer Has the Most to Gain and the Least to Lose originally appeared on Fool.com.
Brian Nichols owns Big 5. The Motley Fool has no position in any of the stocks mentioned. 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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
