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How Dicks Sporting Goods Inc (DKS) Scores Over Amazon.Com, Inc (AMZN)?

 June 05, 2013 11:36 AM
 


(By Mani) Dick's Sporting Goods, Inc. (NYSE: DKS) is considered as one of the best growth stories in hardline retailing, combining square footage growth, strong comps and gross margin drivers into above average EBIT and EPS growth rates.

One of the perceived risks to the story; however is potential on line competition, particularly from Amazon.com, Inc. (NASDAQ: AMZN). However, an analysis shows that DKS has a strong competitive advantage over Amazon on product availability, which could help protect the sporting goods retailer from the threat.

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Moreover, e-commerce is contributing significantly to comps, a key retail metric. Having a multi-channel retail platform enables Dicks to provide a larger product range and offer quicker shipping. If Dick's improve its online advantage over leading retailers such as Amazon, it should reflect in its topline.

"Currently, we estimate that Dick's is generating approximately 5%-6% of its total sales on line, with growth rates in the 30% - 60% range over the past several years. As Dick's continues to improve its online capabilities, including adding in store pick up in 2013, we believe e-commerce should continue to grow at least in the 20% range, which would put it at just about 8% penetration by 2016," Deutsche Bank analyst Mike Baker wrote in a note to clients.

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An analysis of 190 Dick's best-selling products showed that the retailer scored over Amazon in product availability, and it continues to be Dick's greatest competitive advantage.

Of the 190 top sellers at Dick's, across four broad categories and 19 sub categories, only 135, or 71 percent were available at Amazon. DKS availability was best in apparel, where 42 percent of the top sellers in this category were unavailable at Amazon.com.

On the other hand, 77 percent of the 30 top selling footwear products at DKS were available at Amazon. For team sports, 80 percent of the top sellers were available at Amazon while 73 percent was available for golf.

"Importantly however, of the overlapping products that we found at Amazon, only 12, or just 6% of Dick's best sellers were actually sold and shipped by Amazon itself. We also note that in many instances while the product was available at Amazon's website, it was in a limited selection of color and size," Baker noted.

Fifteen of DKS best sellers were sold by a third party but shipped by Amazon while 108 or 57 percent of DKS best sellers were sold and shipped by third parties. This means that 80 percent of the overlapping product was sold and shipped by third parties.

Hence, the statistic of 71 percent of DKS best sellers being available at Amazon doesn't tell the full story as the actual overlap by color and size and including product shipped and sold by Amazon itself is actually much less.

In addition, the pricing gap is not a significant issue. Of the 135 top sellers that were available at both Dick's and Amazon, including sold and shipped through third parties, DKS was priced better on 26, or 19 percent while Amazon was priced better on 88, or 65 percent, with the rest at parity.

Amazon was priced favorably across the board with the highest price differential in footwear. Team sports, apparel and golf products were all priced about 7-8 percent lower than DKS. This price differential is before shipping and taxes.

"But, we think these costs are becoming negligible," Baker said.

At Amazon, prime members would be eligible for free shipping and a number of products are also eligible for "Free Super Saver Shipping," where the products are shipped for free but only within 5-8 days, as opposed to 3-5 days under standard shipping.

On the other hand, DKS charges for shipping but lowered its free shipping threshold to $49 from $99 from a year ago; although, many of the product categories in the study, including footwear, baseball bats, hoodies, fairway woods, etc, were eligible for free shipping and other promotions. Most of the products in the study did retail for more than $49 and would be eligible for free shipping.

"We believe that consumers can for the most part, get their products shipped for free at both Amazon or Dick's. All-in, the overall price difference of the overlapping products in our study was 10%," Baker wrote.

However, in dollar terms, the average price difference is only $13, which would not be a significant concern given a better range of product, size and color availability at DKS.

Meanwhile, Dick's strong relationship with suppliers should also help curb online competition While addressing the potential threats from Amazon, vendor websites such as nike.com, and underarmour.com pose a greater online threat. That said, Dick's has strong relationships with its vendors as evidenced by the continued expansion of the store-within-a-store concept that require significant collaboration.

As of fiscal 2012 year-end, Dick's had 171 Nike Fieldhouse concepts, 91 North Face shops, 97 Under Armour All-American shops and 10 Under Armour Blue Chip shops. 

"We estimate that about 20%-30% of the product that DKS sources from Nike and Under Armour and merchandises in the store-within-a-store locations are exclusive to Dick's within the retail channel," Baker said.

As such, the increasing online momentum and product advantage over the competition should put Dick's in good stead for further improvement in fundamentals, paving the way for multiple expansion.

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