Where Will Dick's Sporting Goods Stock Be in 5 Years?

On Aug. 25, Dick's Sporting Goods (NYSE: DKS) experienced the biggest one-day decline in its history -- dropping by an eye-popping 30% as Wall Street rapidly lost confidence in the stock. Shareholders are worried about several compounding problems ranging from Dick's recent Foot Locker acquisition to changing consumer preferences.

Let's dig deeper to decide if Dick's recent declines are a chance for long-term investors to buy the dip or a signal to stay far away from the stock.

Why is Dick's in trouble?

Dick's latest challenges were revealed in its second-quarter earnings report. On the surface, things might have looked quite good. Net sales jumped 53.2% year over year to $5.59 billion. But this was driven by the recent acquisition of footwear specialist Foot Locker.

While the deal immediately boosted revenue, it cost $2.4 billion, saddling the combined company with new debt and equity dilution as Dick's management issued new shares to raise the cash needed for the transaction. And while management claimed the acquisition would unlock between $100 million and $125 million in cost synergies as the two companies combined their supply chains, these have yet to materialize.

Dick's second-quarter operating margin fell from 12.4% to 7.9% year over year while earnings per share (EPS) collapsed by almost 26% to $3.50 due to a combination of lower earnings and a higher share count.

Expect the pain to continue for this year

While it's too early to know if Dick's Foot Locker acquisition was a mistake, it is already clear that the timing was abysmal. According to executive chairman Ed Stack, the footwear industry is going through a "hangover" as consumers get increasingly skittish about paying full price for name-brand shoes and warehouse inventories start to pile up.

In response, major brands have resorted to aggressive discounting and promotional sales, leading to lower prices across the industry and putting pressure on Dick's as it attempts to maintain its full-price strategy. Stack believes these headwinds will continue for the rest of the year, and in response, management has lowered EPS guidance from between $13.27 and $14.27 to between $10.94 and $11.94 for full-year 2026.

Image source: Getty Images.

That said, there are some silver linings to the situation. For starters, Dick's is more than just a footwear company. Its legacy stores sell everything from athletic equipment to outdoor gear, which gives it enough diversification to weather a downturn in any specific segment. In fact, same-store sales at Dick's-branded locations jumped 4.9% in the quarter.

Furthermore, as a retailer, Dicks essentially serves as a middleman between consumers and manufacturers in the footwear industry. And if consumers decide to permanently shift away from top brands like Nike, Adidas, and Puma, the company can respond by adjusting its product mix.

What will the next five years have in store?

Over the next five years, Dick's Sporting Goods looks likely to continue enjoying solid growth in its core Dick's-branded locations as it expands its store count and digital ecosystems. The future of its Foot Locker subsidiary is more complicated. But ultimately, the current challenges look like a temporary market reshuffling instead of a permanent downturn in the footwear market. And a rebound looks likely over the coming years.

Meanwhile, the recent declines have given Dick's stock a forward price-to-earnings (P/E) multiple of just 9.3, which looks remarkably affordable compared to the S&P 500's average estimate of 21. The company also sweetens the deal by offering a dividend yield of 3.7%, and it has increased its payout for a whopping 11 years in a row.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.