Dick's Sporting Goods today shows off a sign of the times. Ahead of what could be the worst holiday sales season in a decade for American retailers, it's offering up coupons for 20 percent off select merchandise on its Web site alongside other deals to entice an increasingly thrifty consumer.
That's good news for shoppers, but bad news for investors who fell in love with the company over the past several years.
After a 60 percent drop in its share price in 2008, William Blair analyst Robert Simonson says Dick's is now worth about what it was at its IPO price in October 2002. Back then, Dick's sported a low multiple of 8 times trailing earnings before going on to blow past the competition. Now that we've made a round-trip, read the below, and consider what it means for the rest of retail:
[I]n just less than five years Dick’s stock had become a ten bagger. Even now, at a current price of under $11, the stock has produced a 32% compound annual return for those who invested at the initial offering price. This impressive return was the result of management’s delivering on its objective of becoming “best of breed” in its category and in retailing overall. Since its initial introduction to shareholders in 2002, management has combined a differentiated competitive positioning with superior financial controls to produce earnings growth and financial returns that have consistently exceeded its peer group and are approaching best-of-class throughout retailing. Now we’ve almost gone full circle, as Dick’s shares are trading again at 8 times trailing earnings, but now the company’s sales and net income are nearly three times and four times higher than in 2002. Back in 2002 the question was how much evidence would it take for the market to receive before the stock price would begin rising faster than earnings to reflect its superior operating characteristic. Now the question for current and prospective owners is, When will the most intense pressures on consumer spending in the postwar period begin moderating and enable the stock to again reflect a premium valuation to a reestablished superior long-term growth outlook? We don’t have a date certain in mind, but even management has indicated that the industry consolidation could extend well into 2010. While we are uncertain in predicting the date of the beginning of the next major bull market in Dick’s shares, we remain confident that the company has only to weather and complete passage through the current recession before resuming well-above-average absolute and relative performance from the current modest valuation.
Dick's joins Sport Chalet, Big Five, and Cabela's in posting huge equity declines this year, and Simonson notes the broad weakness across the industry is what has kept -- and will keep -- retail in the tank for the foreseeable future.