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DKS Eyes UK Sports Market

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In an effort to enhance its global footprint, Dick's Sporting Goods Inc. (DKS - Free Report) , a full-line sporting goods retailer, has recently announced its plan to make strategic investment in Britain-based sporting goods retailer, JJB Sports.

As per its plan, Dick’s is going to invest 20 million pound ($31.75 million) initially in the loss making company by purchasing 18.75 million pounds ($29.76 million) worth of Junior Secured Convertible Notes and 1.25 million pounds ($1.98 million) of JJB’s ordinary shares. The investment is expected to benefit Dick’s Sporting in enhancing its footprints not only in the United Kingdom but also in whole Europe.

The strategic move will give Dick’s Sporting the authority to appoint a maximum of two members in JJB’s board of directors. Moreover, the company also retains its right to invest in the loss making company and expects to invest 20 million pounds in first-quarter 2013. If Dick’s retains its investing right, the company’s stake in JJB will increase to 61%.

In a separate story, Dick’s Sporting has purchased the intellectual property rights of Top-Flite brands from Callaway Golf Company (CLY - Free Report) in an effort to increase its private brand portfolio. The transaction will add golf materials to the company’s brand portfolio while providing it with the golden opportunity to enter in the golf business.

Our Recommendation

Pittsburgh-based Dick's Sporting Goods remains the dominant player in the industry with significant store expansion and potential share gain opportunities in the U.S. We remain optimistic about the company’s competitive position and consistency of earnings growth.

Further, we remain impressed by the company’s strategy of alternatively investing in key strategic areas including new stores, eCommerce, inventory management systems and private brands. In 2012, the company expects to spend a total of $241 million toward capital expenditures.

We also remain impressed by the company’s solid balance sheet, which is characterized by strong cash position with no outstanding borrowing under its credit facility. On the other hand, investors remain encouraged by Dick’s practice of returning cash to shareholders in the form of dividend payouts and share repurchases.

However, the sporting goods market is highly competitive in nature and Dick’s failure to compete effectively in terms of price, quality or product will thwart its growth potential. The company faces stiff competition from Foot Locker Inc. (FL - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) . Moreover, a weak economy will likely weigh on the company’s profitability in the long term.

Currently, Dick's Sporting Goods has a short-term Zacks #2 Rank (Buy). We maintain our long-term Neutral recommendation on the stock.

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