Why Dicks Is 'The Only Game In Town'

The Sports Authority [TSA] announced that it had decided against reorganizing, and would instead opt to liquidate. Previously, TSA had plans of shutting down about 140 of its 450 stores. Deutsche Bank's Mike Baker said that the latest update from TSA is good news for Dicks Sporting Goods Inc DKS, since the company may get the biggest share of the lost sales of approximately $2.6bn in total.

Incremental Earnings

Dicks was expected to grab 20 percent of these lost sales, translating to $520mm in incremental sales. This equates to a 7 percent boost to comps, in case the company is able to gain the share within the first year, analyst Mike Baker said.

Assuming the same gross margins and 60 percent fixed cost, the added share would result in a flow through of 26 percent of the incremental sales, adding $136mm in EBIT or 170bps. This would add $0.75 to its $3.00 earnings base, Baker mentioned.

The analyst expects Dicks to acquire some of the TSA locations, which would enable the company to increase its market share more easily. These stores would likely be in addition to Dicks' planned store openings of about 35 stores for this year.

“We also note that in the past this type of industry shakeout has helped the surviving entities offset industry concerns for at least a few years,” Baker wrote. Deutsche Bank has a Buy rating for Dicks.