Sporting Goods Stores

Senior Analyst: Jeevan Parameswaran

Junior Analysts: Fred Schmidt, Ankit Sinha, Gurvir Dhaliwal, Shann Chan, Sara Li, Hanumita Gupta, Emili Nirmala, Stephanie Hyun, Amanda Lee

Sporting Goods Stores Industry Sporting Goods Stores Industry

The Sporting Goods Stores industry seems to be on its way to recovery but certain trends and risks may have potentially adverse effects on the industry. Some major trends and risks are:

Consumer demand remains strongly tied to macroeconomic factors

Low growth in sports participation rates, a sign of slow demand growth

Industry’s improving inventory turnover, a signal of its increasing focus on efficiency

The Sporting Goods Stores industry seems to be on its way to recovery but certain trends and risks may have potentially adverse effects on the industry. Some major trends and risks are:

Consumer demand remains strongly tied to macroeconomic factors

Low growth in sports participation rates, a sign of slow demand growth

Industry’s improving inventory turnover, a signal of its increasing focus on efficiency

Executive Summary

Bearish

Products are sourced from sporting goods manufacturers and wholesalers and then sold to the general public via retail stores

Comprises establishments primarily engaged in retailing new sporting goods

Sporting Goods Stores NAICS 45111

Bicycles, camping equipment, exercise and fitness equipment, apparel, footwear and other sporting goods and accessories

Industry Definition

Market Share

Key Distribution Channels

Sporting Goods Stores

29.4%

Online/Internet

Key Distribution

Channels

14%

Specialty Sport Shops

17.7%

• Despite having a relatively low share of the market at present, we believe the internet will become the favored distribution channel in the near future• However, customers who favor

a more personalized experience will continue to buy from sporting goods stores

Our view

Business Model Overview

Small Stores Focus on niche Small store sizes,

target small metropolitan areas

Big Stores Focus on high priced,

private brand sales to obtain higher margins

Mass marketing Maintain strong

customer and supplier relationships.

.

Trend 1: Sports Participation Rates

Industry Growth Resumes in 2011

Macroeconomic Impact

Weak Growth in Sports Participation Rates

Sports Participation Rates

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-4

-2

0

2

4

6

8

10Growth In Sports Participation  (%) • Participation levels posted a 3.3%

decline in 2008 and has since shown weak signs of further growth decreasing from 0.5% to flat growth in 2012

• Participation growth is expected to remain weak in the near future

• Proportion of participants remain strongly male over 2001-2011 span

• However there is potential for growth in the female demographic as shown by

a growing proportion of female participants post 07• Firms in the industry are increasingly targeting females

Trend 2: Macroeconomic Impact

Industry Growth Resumes in 2011

Weak Growth in Sports Participation

Rates

Macroeconomic Impact

Macroeconomic Impact

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32010 2011 2012

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Personal consumption expenditures

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32010 2011 2012

0.00.51.01.52.02.53.03.54.04.5

Gross domestic product*

• Sporting goods are discretionary spending, demand is cyclical i.e. depends heavily on overall economic conditions

• We believe personal consumption expenditures will continue to improve at a slow rate

• Slow GDP growth implies slow recovery of economic well-being

• We believe GDP growth is likely to slow further or decline as the fiscal cliff nears

Trend: Industry Growth Resumes in 2011

Weak growth in sports participation rates

Macroeconomic Impact

Industry Growth Resumes in 2011

Industry Performance

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

Industry Average

S&P 500

• Comparison of weighted and unweighted industry average stock performance shows wide disparity

• When industry average was weighted by market cap, industry showed dramatic rise over the past year, post-recession. • Big players in the sporting goods industry are driving the surge, smaller players are struggling/ falling behind

Unweighted Weighted

Key Companies

Dick’s Sporting Goods(DKS) Foot Locker(FL)

2003

-01

2004

-01

2005

-01

2006

-01

2007

-01

2008

-01

2009

-01

2010

-01

2011

-01

2012

-01

0

1,000

2,000

3,000

4,000

5,000

6,000

24

25

26

27

28

29

30

31

Revenue USD Mil

Gross Margin %

2003

-01

2004

-01

2005

-01

2006

-01

2007

-01

2008

-01

2009

-01

2010

-01

2011

-01

2012

-01

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

5

10

15

20

25

30

35

Revenue USD Mil

Gross Margin %

• FL has shown negative YoY revenue growth from 2008-2010 period, recovering from a 7% drop in revenue in 2010 to a 4% rise in 2011

• DKS has enjoyed positive YoY revenue growth consistently during the same period and has continued upward post 2010, posting a 7% revenue growth

• We believe this reflects Dick’s ability to better adapt to changing economic conditions

CAGR=15.1%

CAGR=2.2%

Key Ratios

2006 2007 2008 2009 2010 20112.6

2.7

2.8

2.9

3

3.1

3.2

Inventory Turnover• Inventory turnover has generally

been stable post 2008• However, inventory turnover is

considerably lower than other retail industries

• We believe the industry is not as efficient as it could be

2006 2007 2008 2009 2010 20112

2.052.1

2.152.2

2.252.3

2.352.4

2.45

Current Ratio • Increasing current ratio post 2009 points toward increasing focus on positive liquidity

• We believe the industry is better prepared to face economic shocks as a result of this

Risk Factors

1

2

3

3) Inventory Management• Failure to predict

consumer demand could adversely

affect margins and inventory turnover

2) Labor Intensity• Greater exposure

to labor market issues

1. External Competition

• Online Retailers• “Superstores”

Industry Outlook

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Sporting Goods Stores

On-Line/Internet

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-4

-2

0

2

4

6

8

Revenue Growth (%)Sporting Goods Stores vs Internet Sales

• Sporting goods stores to continue losing sales to internet

• Within a 5 year horizon, we believe revenue growth is likely to stagnate or slowly decline

Industry Recommendation

ConsConsProsPros

Exposure to a fragile economy Modest growth in consumption

expenditure Sluggish sports participation rates Industry not adapting sufficiently to

growing online sales

Exposure to a fragile economy Modest growth in consumption

expenditure Sluggish sports participation rates Industry not adapting sufficiently to

growing online sales

Improving liquidity, industry players will be better able to deal with any sudden demand shocks

Some customers may continue to favor personalized experience at sporting goods stores

Improving liquidity, industry players will be better able to deal with any sudden demand shocks

Some customers may continue to favor personalized experience at sporting goods stores

Underweight We reiterate our underweight rating as we view the industry as being exposed to too

many external risks with limited organic growth potential.Co

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Key Financials

DescriptionMarket Cap(bn) P/E ROE %

LT Debt to Equity(%)

Price to Book

Net Profit Margin (mrq)

EV/EBITDA

Sporting Goods Stores 16.53 19.54 17.45 38.09 3.174 5.65 9.73

Big 5 Sporting Goods Corp. 0.29 27.41 6.82 35.73 1.81 3.24 8.72

Cabela's Incorporated 3.32 19.37 14.41 174.85 2.55 5.77 14.6

Dick's Sporting Goods Inc. 6.29 23.85 16.65 1.33 3.69 3.82 9.73

Hibbett Sports, Inc. 1.4 20.72 32.54 0.09 6.10 9.35 10.76

Sport Chalet Inc. 0.026NA -18.93 232.71 1.35 0.83 9.69

Foot Locker 5.2 13.8 17.07 5.81 2.26 6.96 6.41

Back up Slides

Customer Demographics

Most Popular Sports 2011

Fiscal Cliff

Not So GoodTemporary extension

of tax cuts

BadUpper Income Tax

Cuts Expire

UglyCongress Fails To

Address Fiscal Cliff

• Likely return to recession within a year

• Stocks predicted to take a hit

TimelineWhat it means for Sporting Goods Stores?• Fall in real disposable

income • Higher unemployment• Higher savings

Shrinking earnings

Frequency of Sporting Goods Purchases

• Emphasize quality• Equipment is meant to last• Brand loyalty

Review Of 2011 Sales

Athletic and sports equipment-

($27.5bn) +3%

Athletic and sport footwear- ($18.4bn)

+5%

Athletic and sport clothing ($9.7bn)

+3%

Industry Overview

» High Barriers To Entry

» High Sunk Costs» Mature Industry

Potential New Competitors Customers

Suppliers Substitutes

Competitors in the Industry

» High Buyer Power» Low product

differentiation

» Large Supplier Market Capitalization

» Monopolies (Nike, Adidas)

» High Threat of Product Substitutes

» Attractive prices and convenience provided by online retailers and “superstores”

» Main Players compete fiercely on price and product authenticity