Dick's Sporting Goods Leads A Crowded Field

(Bloomberg) -- Dick's Sporting Goods has been running up the score on its rivals lately.

The retailer was already leading the sporting-goods pack before competitive pressures mowed down a line of weaker players. The latest casualty is Golfsmith, which declared bankruptcy on Wednesday, following in the recent footsteps of Sports Authority, City Sports, and Eastern Mountain Sports and Sport Chalet parent Vestis Retail Group.

Investors betting on Dick's dominance have sent its stock up 70 percent so far this year. Dick's now trades at around 17 times forward earnings, compared with a five-year average multiple of 16. 

The exits of Sports Authority and Sport Chalet alone left 20 million square feet of sporting-goods retail space and $3 billion in annual sales up for grabs, according to research firm SportsOneSource. About 200 Sports Authority stores were within five miles of a Dick's store. If Dick's grabs just 10 to 20 percent of its defunct rival's market share, that would imply a sales boost of $110 million to $225 million, estimates Oppenheimer analyst Brian Nagel. He upgraded the stock to "outperform" on Thursday.

And Dick's was smart to bid $15 million to scoop up Sports Authority's brand name, a defensive move to keep new competitors out.

But the track is not completely clear for Dick's. There are still plenty of traditional competitors, including privately owned Academy Sports + Outdoors, the largest sporting-goods seller after Walmart and Dick's by sales, according to SportsOneSource.

Academy has grown its footprint by roughly 50 percent, to 200 stores, since private equity firm KKR acquired a majority stake in the family business in 2011. It has a new CEO and plans to open 20 new stores this year.

Academy is privately held, but has fairly happy debt-holders: 

KKR will likely look for an exit at some point. A union of Academy and Dick's looked plausible a couple of years ago -- before the great sporting-goods retailer implosion of 2015-2016. With Sports Authority and other competitors gone, antitrust issues have a better chance of preventing a merger between what are now the sector's top two players.

That leaves an initial public offering as KKR's most likely exit route. With public markets still soft, though, KKR is set to own Academy well beyond the industry average of five years.

In the meantime, Academy could pounce on industry weakness and make strategic acquisitions. Assuming Academy's $2.5 billion debt load is manageable enough for it to scoop up a smaller retailer, potential targets include Hibbett Sports, whose 5,000-square-foot stores would compliment Academy's larger super stores, or online sports retailer Fanatics, which offers a bigger toehold in the growing e-commerce market. 

And neither Dick's nor Academy is immune from the competitive forces prompting the industry's rapid consolidation. Amazon is muscling its way into the business. Nike, Adidas and Under Armour -- once just branded manufacturers that sold through other stores -- are bulking up their direct-to-consumer businesses. Joining them are mass merchants such as Walmart and department stores such as Macy's, which have gotten a much-needed boost from athletic wear.

Dick's recently raised full-year earnings forecasts and said it intends to reach $1 billion in online sales this year. But it shouldn't get too comfortable at the front of the pack. It's crowded up there, with rivals not far behind. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story: Shelly Banjo in New York at sbanjo@bloomberg.net, Gillian Tan in New York at gtan129@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.