Dick's Sporting Goods, Ch. 14: Merger and Acquisition Strategies

Over the past few years DSG has been busy acquiring sporting good businesses. These businesses include Chick's, Galyan's Trading Co., and Golf Galaxy. With no plans to merge in the near future DSG has set its sights on moving westward. DSG has a very strong presence east of the Mississippi River, but it is very spotty to the west. One of the big purchases and steps toward their own personal manifest destiny was to acquire Chick's who had built a name for itself out west.

In another article is seems as is DSG is not slowing down.

When asked about a possible acquisition of Bass Pro Shops, Cabela's or Sports Authority Inc., Kullman declined to be specific but said that Dick's is "an organic grower" that would consider opportunities that make strategic sense regardless of market valuation. He declined to comment further on potential targets.

I would look out for DSG in the future and more acquisitions. DSG must continue to grow to show profitability gains due to the trending Internet purchases. DSG is fending off Amazon and other dot coms as it continues to build its brick and mortar presence. 
http://www.thedeal.com/content/consumer-retail/dicks-seeks-acquisition-play.php

Dick's Sporting Goods, Ch. 13: Strategic Alliances

Dick's Sporting Goods use a strategic alliance to its advantage back in 2012. It invested in JJB Sports of the UK. This was the first investment and expansion overseas for DSG, based out of Pittsburgh. This alliance was created for the benefit of both companies. DSG would end up holding a 61% share of company, allowing it to reap the rewards of the 2012 Summer Olympic Games held in England. JBB had been fighting bankruptcy over the last few years. With DSG's support they would be able to provide confidence to their investors and potentially turn around the company's direction.

The ultimate hope for DSG was that JJB showed enough potential to be a multi-line sporting goods company in the UK and throughout Europe.

This alliance ended up crashing and burning as DSG quickly removed its obligation from JJB after the conclusion of the Olympics.

"Chairman and CEO Edward Stack said that the JJB Sports investment was high risk from the outset, and that Dick's has no further funding obligations to JJB and will continue to monitor the situation."

http://www.thedeal.com/content/restructuring/dicks-sporting-goods-to-invest-in-jjb.php

http://www.businessweek.com/ap/2012-08-14/dicks-sporting-goods-sinks-in-uk-investment

Dick's Sporting Goods, Ch 12: Implementing Corporate Strategy

Name (Connections)	Board Relationships	Title	Type of Board Member	Age
Edward Stack	22 Relationships	Executive Chairman and Chief Executive Officer	--	58

Other Board Members On Board*

Name (Connections)	Board Relationships	Type of Board Member	Primary Company	Age
William Colombo	15 Relationships	--	Galyan's Trading Company, LLC	57
Lawrence Schorr	8 Relationships	--	Boltaron Performance Products, LLC	59
Larry Stone	14 Relationships	--	Dick's Sporting Goods Inc.	61
Jacqualyn Fouse Ph.D.	18 Relationships	--	Celgene Corporation	52
Emanuel Chirico	82 Relationships	--	PVH Corp.	55
Allen Weiss	107 Relationships	--	Dick's Sporting Goods Inc.	59
Vincent Byrd	30 Relationships	--	The J. M. Smucker Company	58
Mark Barrenechea	24 Relationships	--	Open Text Corporation	48

Above is the list of the Board of Directors at DSG. DSG practices duality as Edward Stack is both the CEO and Director of the Board. This has been an ongoing issue and debate for many companies but there has been no sufficient data presented that companies that have duality operate on any different margins than those that do not. This board is also not very diverse with 1 woman and 8 men. They all range between the ages of 48 and 61, a gap of 13 years. This could potentially be a risk that DSG should consider. An expansion of the board to 10-15 members would be more practical as the company continues to grow and expand westward. 

http://investing.businessweek.com/research/stocks/people/board.asp?ticker=DKS

Dick's Sporting Goods, Chapter 11: Diversification Strategies

Dick's Sporting Goods is in the sporting goods and retail industry. This would put them in a limited diversification, single business category according to the book. 95% or more of DSG's sales are that of sporting goods retail. While there is diversification of what field of sporting goods they sell, they are still considered a focused industry and would be nowhere close to that of a Berkshire-Hathaway.

Because DSG is so diversified in what sporting goods it sells it can capitalize on economies of scope within its product offerings. As touched on in the last chapter, DSG has integrated and acquired the rights to many name brands that are only sold at DSG locations. These agreements with other companies, such as Callaway and their Top-Flite line, saves DSG money by being able to purchase the items at an even lower manufacturing price than before, but also creates demand in the product for Callaway because it is only offered at DSG. This allows both sides to maintain higher profits. Dick's doesn't have to produce it, and Callaway doesn't have to sell it. This would fall under the shared activities section of Chapter 11.

DSG is now starting to diversify its stores, as they begin to open Field & Stream stores in the northeast to center solely around the outdoors.

Dick's Sporting Goods, Chapter 10: Vertical Integration Strategies

Dick's Sporting Goods does not vertically integrate into other fields but it does integrate certain brands to privatize them to sell only at DSG stores. This creates demand for the product and higher profit margins upon agreements with the company who created the brand and continues to produce the products.

In the golf section alone, DSG owns the rights to Top-Flite, made by Callaway, Walter Hagen, Maxfli, and Nickent.

Other brands include Koppen and Ativa.

When Dick's is unable to completely own a brand it seizes the opportunity to create deals to own certain rights to specific products and designs from larger, more popular brands such as Nike and Under Armor.

While Dick's hasn't integrated into the production of items directly as a DSG brand shirt or pair of shorts, it has cut out costs by owning brands.

Dicks Sporting Goods, Chapter 9: Tacit Collusion: Cooperation to Reduce Competition

Dick's Sporting Goods hasn't come under fire for any collusion thus far. The main reason for this could possibly be the low barrier to entry in the field of sporting goods. A high barrier to entry, as stated in chapter 9, would be a trait that would potentially be that of a business involved in collusion, even as it may be rare.

A look at DSG's net profit margin over the last decade will help show that low profits margins could insist on a low barrier to entry.

"It's likely that DKS is in an industry with low barriers to entry, spurring high competition. If Gross Margins are at least satisfactory, it's likely DKS invests heavily in R&D and Sales, General & Administrative expenses. 

Only $3.13 of every $100 of Revenue have been profit, on average over the past 10 years."

	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
Net Income	38.26M	52.82M	68.91M	72.98M	112.61M	155.04M	-35.09M	135.36M	182.08M	263.91M
divided by
Revenue	1.27B	1.47B	2.11B	2.62B	3.11B	3.89B	4.13B	4.41B	4.87B	5.21B
Net Profit Margin	3.01%	3.59%	3.27%	2.78%	3.62%	3.99%	-0.85%	3.07%	3.74%	5.06%

The reason DSG has remained successful in a volatile market is because of their contracts with high end brands and their commitment to invest in new equipment and facilities. 

There is evidence that other sporting goods companies are trying to potentially collude against Dick's to make the playing field more level. 

"The CEO of Modell's Sporting Goods is accused of going into a suburban New Jersey store of the rival chain Dick's Sporting Goods, claiming to be a senior vice president of Dick's. A lawsuit filed against him claims Mitchell Modell tried to get confidential information about Dick's online sales and the process it uses to deliver merchandise more quickly."

With this information made public, other sporting goods stores, or all retail for that matter, could obtain private information that would help other companies potentially collude against DSG in order to flatten the competitive marketplace. 

http://www.dailyfinance.com/2014/03/03/warren-buffett-investment-advice-modells-ceo-spy-dicks-sporting-goods/

http://www.vuru.co/analysis/DKS/economicMoat

Dick's Sporting Goods, Chapter 8: Flexibility: Real Options Analysis Under Risk and Uncertainty

Being in the retail business comes with a lot of risk and uncertainty. Again, in the annual report submitted to the SEC, you can find the obvious risks and uncertainties. I will have the excerpt from the report listed below with my comments in the non-bold form. 

DSG states that "Our business is dependent on the general economic conditions in our markets and ongoing economic and financial uncertainties may cause a decline in consumer spending that may adversely affect the Company's business, operations, liquidity, financial results and stock price."

The uncertainty can be found in the economic future of the United States, both near and far. The riskiness can be found in current decisions being made without complete information available to the company without knowing the economic impact it may have, such as new deals with brands for merchandising rights, store expansions into potentially profitable areas, and the movement of online sales and availability of products. 

All of our stores are currently located within the United States, making our operating results highly dependent on U.S. consumer confidence and the health of the U.S. economy. While the national economy is experiencing some level of recovery from the recent downturn, we cannot predict how robust the recovery will be or whether or not it will be sustained. If the economic recovery continues to be slow, or if the economy experiences a prolonged period of decelerating or negative growth, our results of operations may be negatively impacted.

The current economy's percentage of disposable income has been very volatile as can be seen in this graph. 

It seems as if the US still haven't quite fully recovered from the recession and enormous hit taken in 2009. The projections say that disposable income is supposed to grow, but that is another risk and uncertainly that DSG must weigh on. The next bit of the excerpt continues to strengthen this thought...

As a business that depends on consumer discretionary spending, the Company may be adversely affected if our customers reduce, delay or forego their purchases of our products as a result of continued job losses, foreclosures, bankruptcies, higher consumer debt and interest rates, higher energy and fuel costs, reduced access to credit, falling home prices, lower consumer confidence, uncertainty or changes in tax policies and tax rates and uncertainty due to national or international security concerns. Decreases in same store sales, customer traffic or average value per transaction negatively affect the Company's financial performance, and a prolonged period of depressed consumer spending could have a material adverse effect on our business. Promotional activities and decreased demand for consumer products, particularly higher-end products, could affect profitability and margins. In addition, adverse economic conditions may result in an increase in our operating expenses due to, among other things, higher costs of labor, energy, equipment and facilities. Due to recent fluctuations in the U.S. economy, our sales, operating and financial results for a particular period are difficult to predict, making it difficult to forecast results to be expected in future periods. 

Pressure from our competitors could require us to reduce our prices or increase our spending for advertising and promotion. Increased competition in our current markets or the adoption or proliferation by competitors of innovative store formats, aggressive pricing strategies and retail sale methods, such as the Internet, could cause us to lose market share and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

As touched on in my past blogs, competition can be harsh in the retail world, but DSG has a proven track record that risk from other complementary companies are not as big of a threat as the Internet and the mega site Amazon. The opening and expansion of the brand DSG must be followed closely with Internet sales as a large portion of Dick's profits is now online. Amazon could continue to eat into those profits and force DSG to consider other avenues of expansion other than brick and mortar stores as supported below. 

In addition, as the popularity and use of Internet sites continue to increase, our business faces increased competition from various domestic and international sources, including our suppliers. We may require significant capital in the future to sustain or grow our business, including our store and eCommerce operations, and there is no assurance that cash flow from operations will be sufficient to meet those needs or that additional sources of capital will be available on acceptable terms or at all.

Sources:

http://www.sec.gov/Archives/edgar/data/1089063/000104746913003238/a2213667z10-k.htm

https://www.ibisworld.com/gosample.aspx?cid=1&rtid=4‎