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Dick's Sporting Goods: Good Sport

This retailer specializes in equipment that helps you play your game. But is its stock a winner?

Citigroup started coverage of the sporting-goods industry on Monday, giving Dick's Sporting Goods its highest rating of the pack -- a buy, with a high-risk caveat. Not too many years ago, I often got so frustrated with Dick's I might have sold it short.

Particularly if, like me, you're a jack of all sports and master of none, a sporting-goods store is more than just a place to buy a new can of tennis balls or cycling gloves. The unblemished equipment -- racks of racquets, reams of rods and boxes of balls -- represents unscuffed athletic perfection, ripe with possibilities. A sporting-goods store is one of the few places most guys will actually go to shop, as opposed to buy.

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My experience with Dick's stores when I lived in upstate New York ten years ago had been sloppy shelving, poor presentation and spotty inventory that didn't bring the proper reverence to the goods. I was happy to discover better stories where I moved to Virginia, particularly Galyan's. I loved my local Galyan's, with its four-story climbing wall, extravagant displays and often knowledgeable staff. So when the Dick's (symbol DKS) bought the Galyan's chain in 2004, I mourned.

But Dick's had upped its game since I'd last shopped at one of its stores, I discovered. If anything, the former Galyan's store near me has actually improved under Dick's management. So Citigroup may be right when it labels Dick's a "mighty" retailer. Such retailers, Citigroup says, have the potential for impressive growth, increasing profits and a strong balance sheet.

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Citigroup points out that Dick's isn't in a terrific industry. The annualized five-year growth for sporting goods and apparel is only 2.6%, though because of a strong economy and unusual growth in apparel, it grew 7% last year. But Citigroup thinks Dick's sales will grow 15% per year in each of the next several years. Dick's has 268 stores in 34 states, mostly in the East. Its store-within-a-store concept gives discrete areas to sports such as golf, hunting, tennis, soccer and the like.

As Citigroup points out, Dick's is also in a somewhat volatile industry, and its stock price has reflected that -- which is why it gets the high-risk kicker. However, if it can hit that 15% growth estimate, investors should be well rewarded. The average of analysts' estimates puts earnings at $1.84 per share for the fiscal year ending January of 2007. That makes for a price-to-earnings ratio of 20, based on today's closing price of $37 a share. Analysts forecast $2.23 a share for the year ending January 2008. But Citigroup analyst Kate McShane expects the company to earn $2.26 in the January 2008 fiscal year has a 12-month target price of $47 for the stock.

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