1

CFA Institute Research Challenge hosted by

CFA Society of Pittsburgh

Penn State Erie, The Behrend College

2

Prev Close: $ 38.50

1y Target Est: $ 50.81

Beta: 0.93Earnings Date: Mar 1 - Mar 7 (Est.)52wk Range: 33.42 - 60.33 Avg Vol (3m): 2,293,370

Market Cap: $ 4.4 B

P/E (ttm): 12.75EPS (ttm): 3.02Div & Yield: 0.55 (1.47%)

DKS Market Profile1

Services Sector, Sporting Goods Store Industry This report is published for educational purposes only NYSE

by students competing in the CFA Institute Research Challenge. Dick’s Sporting Goods Inc. Date: February 21, 2016 Ticker: DKS Current Price: $38.50 Recommendation: BUY Target Price: $50.81

Strong financial position and valuation methods support a BUY recommendation Our valuation models converged on a one year target price of $50.81 which represents a remarkable 31.97% upside over the closing price of $38.50 on February 19, 2016. Above-average profitability measures reinforce our valuation. In the past three years, DKS has averaged an EBIT margin of 8.51% while their peer group has averaged 8.2%.

Experienced management and strategic planning provide added value DKS managers have displayed a sound understanding of complex industry issues and continue to develop new strategies to remain the leader in a dynamic industry. DKS’ decision to focus on creating a proprietary eCommerce engine and strategic partnerships with sports teams such as the U.S. Olympic team exemplify management’s ability. Further, management continues to build brand recognition through a dedicated marketing campaign. Decaying competitive environment Due to unseasonably warm weather and consumer sentiments, many sporting good retail companies have performed poorly. The Sports Authority (TSA), one of DKS’ primary competitors, has recently come under heavy scrutiny for their poor management decisions and rapid decline from prominence. TSA missed a bond interest payment and had their credit rating slashed by Moody & Associates Inc. Analysts have estimated that TSA will close up to 200 stores with 100 of those closures coming in 2016. DKS is poised to fill this market vacancy due to the fact that 40% of DKS locations are within a 10-mile radius of TSA stores. Expanding economy and high consumer spending The U.S. economy is expected to expand at a growth rate of 2.7% in 2016 as measured by GDP. The main driver of this growth is consumer spending. Consumer spending is expected to increase once the economy regains full employment status. According to Engel’s law, once income rises, as is the case when one becomes employed, a higher percentage of an individual’s income will be spent on discretionary goods.

Figure 3

Source: Bloomberg

Figure 1

Source: Yahoo! Finance and Team

Estimates

1: As of February 19, 2016

Figure 2

Source: Company Data and Team

Estimates

DKS vs GDP

3

Business Description Dick’s Sporting Goods, Inc. (DKS) is a sports and fitness specialty omni-channel retailer that strives to inspire athletes and outdoor enthusiasts to achieve their personal best. The company offers an assortment of high-quality sports equipment, apparel, footwear, and accessories. The company was founded in 1948 by Richard “Dick” Stack as a bait and tackle store and went public in 2002. From 1984 until present day, Edward W. Stack, Dick’s son, has been President and Chief Executive Officer. The company also owns and operates Field & Stream, Golf Galaxy, and True Runner specialty stores. As of January 31, 2015, the company operated 603 Dick’s Sporting Goods stores, 10 Field & Stream stores, 78 Golf Galaxy stores, and three True Runner storesi

.

Company Strategies Authentic Sporting Goods Retailer DKS intends to enhance customers’ performance rather than focus merchandise selection on the latest fashion trends. This merchandising approach may position DKS with advantages in the markets with new product offerings with enhanced technological featuresii. Omni-channel Development The company believes that leveraging all sales channels to deliver seamless, high-quality customer experience across store, web, and mobile technology will differentiate DKS from their online-only competitors. Therefore, DKS has been focusing on building their eCommerce by developing an eCommerce platform that will allow them to have full control rather than using a third-party provider. DKS also attributes much of their profitability to the growth in the number of stores and selling square footageiii . Thus, the company would like to expand their presence and believes they have the potential to reach 1,100 Dick’s Sporting Goods locations. By 2017, they project to have 735-750 location recognizing California, Texas, Florida, and New York as the states with the biggest white space potentialiv. Brand Partnerships & Private Brands The company leverages their brand partnerships to offer authenticity and credibility to their customer. These partnerships provide DKS with exclusive products, differentiating their customers’ experiences. The brand partnerships also add cost efficiencies of shared investments. Besides brand partnerships, DKS seeks to expand their private label brands, which offer customers products they cannot find anywhere else, by investing in a development and procurement staffv. Shareholder Structure DKS has a total of 83,723,095 shares outstanding with 451 institutions holding 92.94% of shares. The largest majority owner is BAMCO Inc. holding 7,726,232 shares or 9.23%. The second largest holder is Vanguard Group Inc. with 6,226,581 shares or 7.44%. The third largest holder is Blackrock Institutional Trust Company with 3,353,202 shares or 4.01%vi. See Figure 5 for further breakdown of institutional holdings. See Appendix A for details on insider holdings.

Industry Overview & Competitive Positioning Economy U.S. GDP is expected to increase in 2016 to 2.7% from 2.5% for 2015. The main driver of this growth will be strong consumer spending. The unemployment rate is expected to fall to 4.5% by end of 2016 from 5%, which is considered to be a level of a fully employed economy. The increase in consumer confidence and disposable income along with tightening labor market and continued low energy prices will fuel healthy growth of retail sale in the fourth quarter of 2015. The forecasted nongas sales growth is expected to be about 4.7% for 2016vii. The increase in consumer spending, business investment and residential investment will not only drive economic expansion in 2016 but over the next few years. The degree of slack in the economy, the difference between actual GDP and Congressional Budget Office’s (CBO) estimate of potential GDP, was about 2% of potential GDP at the end of 2014. The low unemployment rate in 2015

suggests that slack in the labor market has disappeared entirely. However, some slack is expected to continue through 2020viii . Porter’s Five Forces Model of Sporting Goods Stores Industry Threat of New Entrants Economies of Scale Although many sporting goods stores follow a narrow or broad differential strategy, they will often execute this strategy at a competitive price. Therefore, to keep low prices for the customers, the stores need to purchase inventory at a lower price. The best way to accomplish this goal is buying in large volumes which takes advantage of economies of scale. The existence and use of economies of scale is high in the sporting goods stores industry. Capital Requirements The initial start-up costs in this industry are high in order to establish or purchase a retail store and generate sufficient inventory which could prevent new entrants into the industry.

Figure 4

Source: Company Data

Figure 5

Source: NASDAQ

Figure 6

Source: Congressional Budget Office

Figure 7

Source: Congressional Budget Office

4

Switching Cost to Buyers The cost to switch for buyers is quite low. Stores in this industry have similar products and often carry the same brand making it easy for buyers to switch. This also causes buyers to switch according to prices. Establish Relationship with Suppliers In order to be successful in the industry, sporting goods stores need to establish relationships with suppliers to guarantee consistent and reliable supply of high quality products at a competitive price. Many existing stores in the industry have exclusivity agreements with wholesalers which could cause an issue for new entrants trying to secure merchandise. Government Policies Many sporting goods stores also carry firearms which come with regulations and policies that need to be followed. Nonetheless, the regulations and policies are relatively light for the sporting goods industry. Stores carrying firearms must hold a federal firearms license and comply with the Federal Brady Handgun Violence Prevention Act. This act requires retailers to perform a presale background check for consumers that want to purchase hunting rifles. Each background check generates a transaction number which needs to be recorded on Form 4473 of the Bureau of Alcohol, Tobacco, and Firearms and retained by the company for twenty years for auditing purposeix. Conclusion The threat of new entrants is a low force to the sporting goods stores industry due to high barriers to entry including economies of scale, high initial capital requirements, and strong established supplier relationships. Bargaining Power of Suppliers Supplier Concentration Most suppliers in the sporting goods store industry will be athletic and sporting goods manufacturers and sporting goods wholesalers. Over the next five years, the athletic and sporting goods manufacturers are expected to continue to consolidate at an annualized rate of 1.1% to 995 enterprisesx. The sporting goods wholesalers are expected to increase at an annualized rate of 0.2% of the next five years to 16,425 enterprisesxi. The 17,420 manufacturers and wholesalers only include United States companies. The number of suppliers would increase if international manufacturers and wholesalers were included. Therefore, supplier concentration is low. Switching Cost to Buyers The buyer in this case would be the sporting goods stores. A number of suppliers exist within the industry for sporting goods stores to switch. The cost would be relatively low for the stores. Threat of Suppliers’ Forward Integration The potential exists for forward integration with manufacturers or wholesalers opening and operating their own stores, retails outlets, and/or direct online sales sites. Manufacturers and wholesalers have already forward integrated such as Nike who have retail stores. Threat of Buyer’s Backward Integration The threat of sporting goods stores backwards expand into the production and manufacturing of sporting goods is low. Conclusion Bargaining power of suppliers is a moderate force to the sporting goods stores industry. Although suppliers are not concentrated and the switch cost for sporting goods stores is relatively low, the industry is subject to the potential threat of suppliers’ forward integration. Threat of Substitutes Existence of Close Substitutes Consumers purchase sporting goods when the economy is doing well and to enhance their leisure time. Therefore, substitutes to sporting goods could be other leisure products such as computers or electronics, movies, or books. For instance, Wii Fit of Wii Sports, which are exercising video games using motion sensors, would be substitutes. These alternatives increase the threat of substitution. Switching Costs to Buyers The cost of switching to substitute products will be dependent on the product. The prices of substitute products such as electronics, movies, and books can differ to sporting goods such as basketballs, running sneakers, or treadmills. Therefore, the cost of switching for the buyer is moderate. Conclusion Threat of substitutes is a moderate force to the sporting goods stores industry. There are many close substitutes for sporting goods and the switching cost to buyers can vary. Bargaining Power of Buyers Number of Buyers The main buyers for sporting goods stores are individual consumers. According to the 2014 United States Census, about 299 million people out of 319 million are age 5 and above who are all potential buyers/users of sporting goodsxii. However, sporting goods stores also rely on sponsorship partnership with larger organization such as local team leagues or large professional organization. For example, Nike is the official uniform sponsors for National Football League (NFL) and Major League

Baseball (MLB). In 2017, Nike will replace Adidas as the official uniform sponsor for the National Basketball Association (NBA)xiii . Dick’s Sporting Goods has partnered with Team USA for the Olympicsxiv. Individual consumers will have very low bargaining power; however, larger organization such as NFL or Team USA will have more bargaining power.

Revenue COGSNike Inc. 1.50% 10.65%Under Armour Inc. 14.40% 9.70%adidas AG 2.14% 8.13%Jarden Corp 3.04% 5.40%VF Corp 1.48% 2.93%Wolverine World Wide 4.49% 2.23%Columbia Sportswear 4.83% 1.82%Asics Corp 2.25% 1.63%Callaway Golf Co 8.36% 1.52%Puma Se 1.92% 1.50%Vista Outdoor Inc 3.24% 1.31%Berkshire Hathaway 0.03% 1.12%Mizuno Corp 2.79% 0.92%Sports Direct International 1.07% 0.90%

DKS Main Suppliers

Figure 8

Source: Bloomberg

Figure 9

Source: U.S. Census Bureau

5

DCF 45.14$ EV/EBITDA 56.48 Average 50.81$

Current Market Price1 $38.50Target Price Appreciation 31.97%Recommendation BUY

Value of the Firm

TSA Revenue/Store2 5,532$ # of Store Closings 100% of stores in Proximity to DKS 40%

Revenue from closing stores2 221,280$ Est % of Sales from DKS Temp 30%

Sales lost at DKS2 66,384$

DKS Full year sales2 6,814,479$ % Sales lost 0.97%% Sales lost BPS 97

TSA Store Closing Impact

Product Differentiation Product differentiation in the sporting goods store industry is low. Although many stores carry their own private labels, a large portion of their inventory and sales goes to name brands such as Nike or Adidas which most stores carry. Buyer’s Volume Individual consumer’s purchasing volume is low. However, sporting goods stores receive high volume sale from their partnerships with team leagues both locally and nationally. Conclusion Bargaining power of buyers is a moderate force to the sporting goods stores industry. Although the main customer for a sporting goods store is individuals, many stores have sponsorship partnership with large organizations who will have more bargaining power over the sporting goods stores. Extent of Rivalry Number of Competitors Competitors in the sporting goods stores industry do not consist of only other sporting goods stores but also large retail and super stores such as Kohl’s Department Stores or Walmart. This threat is relatively new to the sporting goods industry. Sporting Goods stores (including department and superstores) is expected to grow over the next five years at an annualized rate of 0.4% to 41,044 enterprises as superstore retail operations continue to enter the industryxv. Market Share Concentration The sporting goods industry is characterized by being highly fragmented with a large number of small players and several large companies. Each large company contributes about 10% of total industry revenue. About 50% of total industry companies are non-employers or owner-operated who only make up about 3.5% of total industry revenue. In 2015, the industry’s top four players are expected to generate about 41.6% of industry revenuexvi. Industry Growth Rate The sporting goods stores industry revenue is expected to grow at an annualized rate of 1.6% over the next five years. This growth combined with the new trends of health conscientiousness makes this industry more appealing to existing or start-up companiesxvii. Conclusion The extent of rivalry is a high force to the sporting goods stores industry. The industry is highly competitive with large retail stores entering the market and with the continued trend of consolidation of smaller players within the industry. Industry Summary In summary, the sporting goods store industry has a moderately favorable profitability based on one unfavorable, three moderate, and one favorable forces. See Figure 10 and Appendix B. Life Cycle Stage The sporting goods store industry is in the mature phase in its industry life cycle due to its contribution to the U.S. economy, consolidation, lack of technological innovations, and market acceptance peaking. The industry’s contribution to the economy is expected to grow at an average annual rate of 2.5% during the next 10 years which is consistent with the overall economyxviii . Industry Competitors Dick’s Sporting Goods is the industry leader with 15% market share of the sporting goods store industry. DKS has a variety of different competitors since it sells both sports apparel and equipment but also a variety of outdoor equipment through its Field & Stream stores. Therefore, competitors include other retailers of sports apparel and equipment but also other outdoor and hunting stores which can include small owner-operated stores. The other top three competitors of the industry include Academy Sports & Outdoors with 9% market share, Cabela’s with 7% market share, and The Sports Authority with 6% market sharexix. See Appendix C for individual competitor analysis and competitive strategy analysis.

Investment Summary Strong financial performance, omni-channel strategy, and decaying competition Our team has reached a recommendation of BUY based on current market conditions and our valuation models. The valuation models arrived at a one year target price of $50.89 which projects a 32.19% upside to the current market price. The target price is justified through the use of key performance indicators and robust valuation models coupled with strong economic analysis. The remarkable upside potential can be

explained by a downgrade in investor sentiment due to DKS’ underperformance in Q3 2015. However, Q3 losses will be mitigated by the firms’ ingenious promotional sales during the holiday season to liquidate cold-weather apparel and other seasonal products. The decay in competitiveness in the market, DKS’ efforts to expand its e-commerce segment, and strong, stable financial performance will drive DKS market price towards our target. Decaying competition provides additional growth opportunities One of DKS’ primary competitors in the market is TSA. TSA represents 6% of the sporting goods stores industryxx . TSA has experienced significant financial turmoil in the past year due to unseasonably warm weather, poor management, and high promotional activity. TSA had its credit rating dropped from Caa1 to Caa3 by Moody’s Investors Service Inc. after missing a $21 million interest payment on subordinated mezzanine debtxxi. TSA also reduced its workforce at its headquarters by 100 employees, 16 of which were

Figure 10

Source: Team Estimates

Figure 11

Source: IBIS World

Figure 12

Source: Team Estimates

1: As of February 19, 2016

Figure 13

Source: Canaccord Genuity and Team

Estimates

2: In Thousands

6

PV of CF0 373,882$ PV of CF1 215,693$ PV of CF2 263,981$ PV of CF3 303,249$ PV of CF4 289,851$ Terminal Value 4,372,892$

Sum of CF 5,819,547$ Implied Target Price 45.23$

Current Market Price1 38.50$ Implied Appreciation 17.48%Recommendation BUY

DCF Summary (In Thousands)

employees in the sales department. Further, speculation exists from many analysts such as Sam Poser of Sterne Agee CRT and Camilo Lyon of Canaccord Genuity that TSA will be closing up to 200 of its stores within the next year. With 40% of DKS’ stores located within a 10-mile radius of TSA stores, TSA store closing offer DKS great potential to increase sales and puts them at an advantage against their peers. Lyon estimates that DKS will be impacted by a sales increase of $119 million for every 100 TSA store closingsxxii. However, it is important to note that liquidation sales precede store closings. We have estimated that DKS will suffer from an approximately 97 BPS decline in comps for every 100 store closings in the short-term (See Figure 13). Strong Financial Performance DKS has delivered consistent, strong profitability and sustainable growth over the last 5 years. Physical location expansion, eCommerce optimization measures, and accurate market analysis have contributed to DKS’ steady growth of its net sales. Gross margins have remained stable over this timeframe, hovering around an average of 31% (See Figure 14). DKS strong financial position allows them to reimburse their investors through dividends and a share-repurchase program. In March 2013, the company introduced a five-year repurchase program worth up to approximately $1 billion of the company’s common stock. Their 10-K reports that during 2014 only about $200 million was repurchased into treasury as compared to the previous year of $255.6 million. In 2015, Dick’s was able to repurchase close to $300 million of the supposed $1 billion plan leaving $244.4 million to be repurchased in the future, given that the firm can continue to produce sufficient earnings measures.

Omni-channel sales continue to grow DKS continues to focus on delivering a consumer-focused, omni-channel shopping experience. Consistent with this, Dick’s remains intent on becoming independent from its eCommerce vendor. Cutting ties with the vendor will make implementation faster and allow Dick’s to access cross-channel data to optimize their consumer’s experience. In FY2014, DKS’ eCommerce sales increased to 9.2% of total sales compared to 7.8% in FY2013. In Q3 2015, eCommerce reflected 8% of net sales, up from 7.3% in Q3 2014. During Q3 2015, Dick’s opened up 27 new Dick’s Sporting Goods stores and seven new Field & Stream stores. Further, five Dick’s Sporting Goods stores were relocated, two were remodeled, and one was closed. In the beginning of the fourth quarter, Dick’s completed its 2015 store development plan by opening one more Dick’s Sporting Goods store and relocating another one. These store openings represent high potential growth in eCommerce earnings. According to DKS, whenever a store is opened in a new market, eCommerce earnings nearly doublexxiii . A snapshot of Dick’s stores and store square footage is provided in Appendix D. Poor Q3 2015 Performance puts DKS at a deep discount DKS’ earnings report missed top and bottom-line consensus figures. DKS’ reported consolidated net income for the third quarter ended October 30th, 2015 of $47.2 million, or $0.41 per diluted share remained flat compared to last year’s third quarter net income of $49.2 million, or $0.41 per diluted share. Dick’s net income per diluted share was $0.45 after removing a litigation settlement charge from earlier this year. This figure meets the lower end of the guidance figures of $0.45 to $0.48 provided by Dick’s in August 2015xxiv. Following the announcement, DKS share price dropped 9.43% to $36.96 on November 17th. DKS is currently valued 6.0% below its pre-announcement price of $40.81.

Same-store Sales (Comps) Same-store sales are one of the most important metrics of performance in the retail sector. Same-store sales indicate how well a firm’s established locations have performed and allow investors to identify how much sales growth was attributed to new locations and how much was attributed to the established locations. In Q3 2015, net sales increased 7.6% to $1.6 billion. Despite this increase, comps suffered and only increased by 0.4% compared to Dick’s estimates of a 1% to 3% increase. The lag in comps is also apparent when compared to Q3 2014 comps of 1.1%. DKS’ underperformance in comps was an effect of poor seasonal conditionsxxv. These poor seasonal conditions had an adverse effect on comps performance within the industry and sector. Two of DKS competitors, Hibbet Sports (HIBB) and Cabela’s (CAB), missed their guidance figures with 0.6%xxvi and -3.3% comps in Q3 2015 compared to Q3 2014xxvii. Further, three of the largest companies within the retail sector are also experiencing sluggish comps performance. Gap Inc. (GPS), American Eagle Outfitters, Inc. (AEO), and Macy’s Inc. (M) have all missed consensus same-store sales figures. GPS reported negative comps across all of its brands. AEO missed a Zack’s consensus figure by nearly 1%. M reported comps of -4.7%xxviii .

Valuation We valued DKS using two different models: Discounted Cash Flow (DCF) and comparable company ratio analysis. Discounted Cash Flow (DCF) The Free Cash Flow to Firm (FCFF) approach is used to analyze company valuation based on cash flow projections. Although DKS carries virtually no debt, the FCFF is appropriate after capitalizing their operating leases. Our DCF model produced a target price of $45.23. This target price represents a 17.48%

Figure 14

Source: Company Data

Figure 15

Source: Transperfect

Figure 16

Source: Company Data and Team

Estimates

1: As of February 19, 2016

7

Market Value of Equity 4,547,103,253$ Market Value of Debt 102,243,000$

Risk Free Rate1 1.76%Beta 0.931 Cost of Equity 7.35%Cost of Debt 2.51%Corporate Tax Rate 38.10%Calculated WACC 7.22%

WACC Inputs

Cabela's Inc 3.9%

Hibbett Sports 9.4%

Finish Line, Inc. 8.9%

Sportsman's Wharehouse 5.7%

Big 5 Sporting Goods 7.6%

Peer Group Average 7.1%

Peer Group WACC

AVG Growth Relative to Industry 508.73%

Projected Industry Growth 1.60%

Projected DKS Growth 8.14%

DKS Project Sales Growth

Peer Median Ratio 6.98

DKS EBITDA2 737,303.35$

Long Term Debt2 102,243.00$

Cash2 221,679.00$

Implied Market Value2 5,264,174.96$ Implied Target Price 56.48$

Current Market Price1 38.50$ Implied Appreciation 46.70%Recommendation BUY

EV/EBITDA Summary

Company EV/EBITDABig 5 Sporting Goods 6.98Finish Line, Inc. 5.81Hibbett Sports 5.56Sportsmans Warehouse 12.15Cabela's Inc 18.27Median 6.98

Comparable Company Ratio Analysis

upside to the closing price of $38.50 on February 19, 2016. The following were the most influential factors contributing to our DCF analysis. Weighted-Average Cost of Capital (WACC) Cost of Equity The Capital Asset Pricing Model (CAPM) was used to calculate the cost of equity. A beta value of 0.9313 was derived by regressing DKS’ daily returns to the S&P 500 daily returns from 1/2/2013 – 1/15/2016. The 10-year treasury rate of 1.76% serves as the risk-free rate and Dr. Damadoran’s total equity risk premium for the United States of 6% serves as the market risk premiumxxix. Our cost of equity was calculated to be 7.35% Cost of Debt DKS’ cost of debt was derived using Dr. Damadoran’s methodxxx. First, a synthetic credit rating was estimated based on DKS’ interest coverage ratio and then a yield spread was assigned based on that rating. The calculated yield spread was summed with the risk-free rate to calculate a cost of debt of 2.51%.

Using a weighted average of the cost of equity and cost of debt of 99.85% and 0.15%, respectively and incorporating the corporate tax rate of 38.10%, we arrived to a WACC of 7.22%. Without context, 7.22% seems like a low WACC. However, when compared to DKS’ peer group, this figure lies within the range and is 12 BPS higher than the industry average of 7.1%. Sales Growth Rate DKS’ growth rate was determined to be 8.14%. To arrive to this figure, DKS’ growth relative to the industry from 2009-2014 was used. DKS has grown at an average of 508.73% relative to the industry in that time period. Since DKS offers steady growth, as seen by a 2 BPS spread from their revenue PGR of 9.1% and CAGR of 9.08%, there is reason to believe that DKS strong performance relative to the industry will continue. The industry is expected to grow at a rate of 1.6% which translates to a DKS growth figure of 8.14%.

Capital Expenditures (CAPEX) Capital Expenditures are expected to grow at a compounded rate of 31.68%. This high growth rate reflects DKS’ plan to grow to 760 stores by the end of Q4 2017xxxi. Corresponding leasehold improvements, pre-opening store expenses, and furniture, fixture, and equipment expenses will all increase as a function of the additional stores.

Terminal Growth Rate The terminal growth rate was determined to be 2.1%. This terminal rate reflects an average growth rate of the economy as DKS’ perpetual growth will not exceed that of the economy. The industry growth rate of 1.6%xxxii was not used since it has been established that DKS has the potential to grow faster relative to the industry. Sensitivity Analysis The two most sensitive inputs to the DCF model are sales growth and terminal rate. A sensitivity analysis was conducted to determine potential appreciation given different sales growth and terminal rates. Assuming a worst case scenario of 0%, the models implied an appreciation of 22.45%. Considering DKS’ ability to grow faster than the industry, the terminal growth rate of the industry was used as a worst-case scenario. When the terminal growth rate of the industry was used as the terminal rate, the models implied an appreciation of 26.29%. In the case that sales growth was 0% and the terminal rate was 1.6%, the model implied an appreciation of 17.14%. See Appendix E for more detail. Comparable Company Ratio Analysis As part of the comparable company ratio analysis, four ratios were reviewed: enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA), EV to earnings before interest and taxes (EBIT), EBITDA margin, and operating margin. The EV/EBITDA ratio was used as the basis of the comparable company ratio analysis. The EV/EBITDA ratio is the most appropriate since DKS doesn’t have that many direct competitors in its market and these competitors within the peer group all have varying capital structures. The average EV/EBITDA ratio for the peer group was 6.98. This implies a DKS EV of $5,144,738.96 thousand given DKS EBITDA of$737,303.35 thousand (See Figure 20). The analysis provided a terminal value of $56.48 which represents a 46.70% upside to the closing price on February 19, 2016. Competitor Selection Competitors were selected from a pool of companies listed as competitors on FactSet. We narrowed the pool by identifying which companies sold products most related to DKS’ own and operated with the same competitive strategy. Our final list of competitors was Big 5 Sporting Goods, Cabela’s Inc, Finish Line Inc., Hibbett Sports, and Sportsman’s Warehouse. The average EV/EBITDA for these five companies was 6.98.

Figure 17

Source: Company Data, U.S. Treasury,

and Team Estimates

1: As of February 19, 2016

Figure 18

Source: Bloomberg

Figure 19

Source: Team Estimates

Figure 20

Source: Company Data and FactSet

1: As of February 19, 2016

2: In Thousands

Figure 21

Source: FactSet

8

2012 2013 2014 2015F 2016F 2017F 2018F 2019F

Liquidity

Current Ratio 1.59 1.62 1.65 1.62 1.70 1.73 1.70 1.66

Quick Ratio 0.38 0.24 0.27 0.29 0.36 0.37 0.33 0.27

Cash Ratio 0.34 0.18 0.20 0.22 0.30 0.31 0.26 0.21

Efficiency Ratios

Inventory Turnover 3.79 3.67 3.61 3.57 3.64 3.64 3.64 3.64

Days in Inventory 100.05 105.34 107.37 104.25 104.25 104.25 104.25 104.25

Accounts Receivable Turnover 149.37 122.73 92.80 83.28 92.94 92.94 92.94 92.94

Days in Accounts Receivable 2.34 3.75 4.44 4.08 4.08 4.08 4.08 4.08

Profitability

EBIT Margin 8.50% 8.84% 8.21% 10.00% 9.90% 9.81% 9.73% 9.65%

Gross Profit Margin 31.48% 31.29% 30.62% 31.13% 31.13% 31.13% 31.13% 31.13%

ROA 10.07% 10.99% 10.02% 11.86% 11.13% 10.56% 10.14% 9.74%

ROE 18.31% 19.95% 18.79% 20.44% 18.45% 16.90% 15.69% 14.72%

Financial Leverage

Debt to Equity 0.0103 0.0044 0.0558 0.0458 0.0384 0.0327 0.0282 0.0245

Debt to Assets 0.0056 0.0024 0.0019 0.0515 0.0450 0.0409 0.0383 0.0361

Interest Coverage 82.18 187.45 173.94 181.63 232.12 237.71 246.92 274.51

Shareholder Ratios

EPS 2.39 2.75 2.89 3.84 4.12 4.41 4.73 5.08

Dividend Payout 27.28% 16.26% 12.41% 14.34% 14.34% 14.34% 14.34% 14.34%

Financial Analysis

Profitability In the past three years, DKS has averaged an EBIT margin of 8.51% while their peer group has averaged 8.2% in the same time-span. DKS higher EBIT margin is a function of their COGS declining as a percent of their sales from 69% in 2012 to 59% in 2014. DKS offers superior returns on both assets and equities. In the past three years, DKS has returned an average of 10.36% on their assets. Similarly, the peer group has averaged 6.22% over the past three years. However, the peer-group average return on assets has been on a decline with figures of 7.54% in 2012, 6.31% in 2013, and 4.8% in 2014. DKS average return on equity for the three-year-time-span of 19.02% is nearly four times greater than their peers average of 5.3%. Turnover DKS has performed at an above-average level with respects to turnover when compared to their peers. In 2014, DKS’ had an inventory ratio of 3.61 and a days-in-inventory figure of 107.37 compared to their peer figures of 2.8 and 141.53, respectively. For AR turnover analysis, the peer median figure was used in place of the average since Sportsman Warehouse was an outlier. DKS’ collects credit sales faster than their peers with 4.44 days in accounts receivable compared to a median 6.96 days in accounts receivable. Consistent with this, DKS AR turnover figure of 92.80 is 52.56% more than the peer median figure of 60.83. Liquidity While DKS is currently operating from a liquid position, their liquidity is below industry averages. However, DKS’ current ratio has risen from 1.59 in 2012 to 1.65 in 2014, while their peers’ average has fallen from 2.75 to 2.58 during the same time period. DKS’ cash and quick ratios suffer from the fact that DKS was committed to a share-buyback program. From 2012 to 2013, DKS cash and quick ratios dropped 36% and 47%, respectively. Further, during that period their cash position decreased 47% while their treasury stock increased 128%. While it is currently lagging behind its peers, DKS’ decrease in liquidity represented an added value to shareholders.

Figure 22

Source: Company Data and Team Estimates

Figure 23

Source: Company Data

9

Financial Leverage Due to large cross-sectional differences in capital structure within their peer group, financial leverage figures include outliers so median figures were used. DKS’ leverage figures are skewed by their low-debt capital structure. DKS’ maintained a debt to equity ratio of 0.01 in 2014 which is much lower than their peers’ median figure of 0.27. Conclusion Overall, DKS’ is in an extremely strong financial position compared to its’ peer group. Through strategic financing and marketing decisions, DKS has improved its financial position and increased its longevity. Their strong financial position translates to a great investment for an investor that is looking for sustained growth and solid earnings.

Investment Risks Consumer Discretionary Spending Dick’s Sporting Goods is highly dependent on consumer discretionary spending. A decrease in consumer discretionary spending can lead to a decrease in store sales, customer traffic or the amount of money each consumer spends. This result is exaggerated if consumer spending is down for an extended period of time. In addition, during times of low discretionary spending, customers steer away from higher-end products which could affect profitability. Competition Intense competition in the sporting goods industry could limit growth and profitability. Competition in the sporting goods industry is high and quite fragmented. Competitors in the sporting goods industry not only consist of other sporting goods stores, but also other big box stores (i.e. Walmart)xxxiii . Dick’s Sporting Goods leads the sporting goods stores industry with 15% of the market (see Figure 24). The rest of the market is divided among three other industry leaders and several other companies. Competition is intensified as Dick’s Sporting Goods is compared with its competitors based not only on market share but also name recognition, marketing presence, and amount of financial resources. Some competition factors include price, quality, variety, advertising, service, location, and reputation. Ability to Anticipate and Respond to Changing Consumer Demand Failure to accurately predict or effectively react to changes in consumer demand and shopping patterns can cause loss of customer base and declining sales. Customer preferences cannot be predicted with certainty and in fact continually change. Purchases are often completed months in advance of actual product deliveryxxxiv. Shortages of popular products could negatively affect sales if consumer demand is underestimated while overestimated demand could force price markdowns or missed opportunities for other products. Development of Private Brand Offerings A private brand is a product that is exclusively manufactured for a retailer and prices for private brands are typically set cheaper than competing name brandsxxxv. Dick’s Sporting Goods plans to grow private brand offerings through brands they own and brands they license from third parties. These private brand offerings include their new retail concepts, including Field & Stream and True Runner concepts. They invest capital into the development, procurement of resources, and marketing efforts relating to these private brand offeringsxxxvi. When introducing a new private brand offering, the risks are magnified because the company not only invested in the purchasing of the product but also in the production of the product; this increases the risk for negative effects on net profit and sales. Factors that could lead to the curtailment or abandonment of a private label brands include unexpected costs or delays, demand on management resources, legal or regulatory constraints, and change in consumer demandxxxvii. Although a number of risks exist associated with private branding, risks that come from not developing private brands also exist. Private brands help with profit margin and traditionally allow retailers to offer products with higher margins. According to Time Magazine, the financial crisis of 2007-2008 brought an increased demand for private brand itemsxxxviii . If companies do not engage in private brand offerings, they can lose this opportunity of higher profits and forfeit consumers who desire private label brands. Performance of Professional Sports Teams in Core Regions of Operation Dick’s Sporting Goods sells a significant amount of professional sports team merchandisexxxix. Sales for team merchandise fluctuate based on a given team’s performance. Teams that reach the playoffs can expect up to a 9.8% increase in merchandise and apparel salesxl. In an extreme example, the NBA’s Houston Rockets increased merchandise sales by 397% after their 1994 NBA Championship seasonxli. In this example, if Dick’s Sporting Goods chose not to invest in the Houston Rockets but instead in another team, it would miss out on the 397% increase in Houston Rockets merchandise sales. Varying professional team performances could cause financial results to fluctuate from year to year. Dick’s Sporting Goods also uses individual athletes to market products and advertise stores. The retirement or scandals in which these individuals may be involved in could negatively impact financial results.

Figure 24

Source: IBIS World

10

Development of an Internal eCommerce Platform Dick’s Sporting Goods switch from a third-party provider to maintaining its own eCommerce platform will have its risks. These risks include implementation, supply, and distribution delays; incurring more cost than budgeted; or technology interruptionsxlii . These risks could disrupt their relations with current and future customers and cause an adverse material effect. Senior Secured Revolving Credit Facility Dick’s Sporting Goods believes it has the potential to reach 1,100 locations. By 2017, they project to have 735-750 locations “recognizing California, Texas, Florida, and New York as the states with the biggest white space potential”xliii . These expansion initiatives will require sufficient capital. DKS current senior secured revolving credit facility contains provisions that limit its ability to incur additional debt or make substantial asset sales that could be used to finance operations. These provisions include requirements to generate sufficient cash flows from operations. In the event of liquidation or dissolution, the lenders under the senior secured revolving credit facility would receive payment in full from assets before any distribution to the shareholdersxliv .

Dependency on Suppliers and Proprietary Rights Similar to most retailers, DKS is dependent on its suppliers, distributors, and manufacturers to provide sufficient quantities of products in time for the consumers. The company does not generally have long-term contracts with major suppliersxlv. The risk of major suppliers failing to provide adequate supply of product or continue developing new products could have a material effect for DKS. The company also relies on licensing agreements for names it does not own such as “Adidas” or “Reebok” to attract customers. These licenses contain customary termination provisions allowing the licensor to terminate license upon failure to purchase or sell a minimum volume.

Other –Corporate Governance Dick’s Sporting Goods corporate governance includes four executive officers and four senior vice presidents. Chairman and CEO is Edward W. Stack, age 60, serving since 1984 when his father and founder Richard “Dick” Stack retired. André J. Hawaux, age 54, has served as Executive Vice President –Chief Operating Officer/Chief Financial Officer since February 2015. Mr. Hawaux joined the company in June 2013 as Executive Vice President –Finance, Administration and Chief Financial Officer. Prior to joining, he served as President, Consumer Foods at ConAgra Foods, Inc. Executive Vice President –Product Development and Planning since September 2014 is Lee J. Belitsky, age 54. Mr. Belitsky has been with the company since 1997 serving a myriad of positions. Michele B. Willoughby, age 49, serves as Executive Vice President –eCommerce and Supply Chain since July 2013. Ms. Willoughby has been with the company since 2004 and prior to joining she was employed with Kohl’s Department Stores. The four senior vice presidents include: John E. Hayes III, age 52, as Senior Vice President, General Counsel and Secretary; Lauren R. Hobart, age 46, as Senior Vice President and Chief Marketing Officer; Joseph R. Oliver, age 55, as Senior Vice President and Chief Accounting Officer; and Deborah M. Victorelli, age 52, as Senior Vice President –Human Resourcesxlvi. See Figure 25 for total executive compensation. Management SWOT The major strength of DKS management comes from over half the executives remaining with the company for over a decade or more. It is beneficial to have an understanding of the company beyond the scope of their most recently appointed positions. Nonetheless, half of the executive team has been in their most recent executive roles for 2 years or less creating a potential weakness. Dick’s Sporting Goods’ CEO,

Edward W. Stack, has been with the company since 1977, operating as CEO since 1984, and getting closer to retirement age. He creates both a potential strength and weakness. Should Mr. Stack leave the company, it would lose in-depth knowledge of issues, opportunities, and challenges that he holds –creating a weakness. However, in the event the company would lose Stack new management would be brought in which could be a potential catalyst and strength for the company. The current competitive landscape and the outlook of the industry continuing to consolidate creates a threat and opportunity. Those new to leadership will be challenged to adapt to their new roles while also adjusting to the changing industry environment. However, the recent news about The Sports Authority’s missed interest payment and store closings and Cabela’s rumored potential buy-out creates opportunities for management to expand the company.

Officers

Total

Compensation

2014

Total

Compensation

2013

Edward W. Stack $ 4,624,468 $ 8,528,709

Andre J. Hawaux $ 2,132,127 $ 4,237,689

Lee J. Belitsky $ 1,588,795 $ -

Michele B.

Willoughby $ 2,179,073 $ 2,839,229

Deborah M.

Victorelli $ 11,338,130 $ -

Joseph H.

Schmidt

(Retired January

29, 2015) $ 2,144,179 $ 3,978,317

John G. Duken

(Retired

November 29,

2014) $ 1,506,323 $ 2,808,640

Figure 25

Source: Company Data

11

Named Executive Officers, Directors and Common Stoc k Class B Common Class B Voting

Edward W. Stack 2,062,980 21,053,742 2.18% 84.55% 61.83%André J. Hawaux 90,075 — * — *Lee J. Belitsky 149,278 — * — *Michele B. Willoughby 121,594 — * — *Deborah M. Victorelli 36,227 — * — *

Joseph H. Schmidt (retired January 29, 2015) 361,029 — * — *

John G. Duken (retired November 29, 2014) 193,835 — * — *Mark J. Barrenechea 8,871 — * — *Vincent C. Byrd 21,247 — * — *Emanuel Chirico 125,210 — * — *William J. Colombo 433,427 1,612,080 * 6.47% 4.83%Jacqualyn A. Fouse 31,260 — * — *Lawrence J. Schorr 63,862 — * — *Larry D. Stone 113,345 — * — *Allen R. Weiss 23,510 — * — *

All Executive Officers and Directors as a group 3,495,249 22,665,822 3.66% 91.02% 66.83%

Shares Beneficially OwnedPercentNumber

Appendix A

Source: Company Data

12

Appendix B

0 No interaction 1 Insignificant 2 Low

3 Average 4 High 5 Very High

The scale of interaction

Final Rating: 2.6

13

Appendix C Competitors Analysis The Sports Authority Inc. Sports Authority is a top private US sporting goods company. It sells a full line of sports and fitness equipment, athletic shoes, and apparel. Along with other sporting goods stores, The Sports Authority has done well in categories such as team uniforms, running, hunting, and camping gear compared to its gold and fitness equipmentxlvii . The company recently skipped a $21 million interest payment –it has a 30-day grace period to complete the missed payment or it will trigger a default. Sports Authority currently operated 450 stores nationwide; however, there is speculation the company could be preparing to close up to 200 of those stores. About 40% of The Sports Authority’s stores are within ten miles of Dick’s Sporting Goods location giving the potential for an increase in same-store sales growth for DKSxlviii .

The Sport’s Authority reports that management has taken responsibility for “balance sheet restructuring” within the next 30 days. The Denver Post reports the store cut 100 jobs within its corporate headquarters as of January 29th, which included 16 individuals designated to their sales division. Considering that the store may have to condense its location volume geographically, 41 states will now have mutual management between stores. Consumer analysts also predict the move will decrease their market share within the Sporting Goods Industry to even below their current 5.6%. Those individuals particularly in sales, carry the requirements to fill management positions at Dick’s Sporting Goods in route of their 300+ store expansion by the year 2020xlix.

Cabela’s Incorporated (CAB) Cabela’s is an outdoor sporting goods retailer operating close to 60 stores nationwide. It is known for its large store format including waterfalls, mountain replicas, and in-store shooting galleries. The company has been growing steadily over the past several years with revenue growing more than 1% in 2014. Cabela’s announced its plan to open new retail stores during 2015l. However, there has been talk of potential takeover interest including from competitor Bass Pro Shops and others that asked not to be identifiedli.

Big 5 Sporting Goods Corp (BGFV) Big 5 Sporting Goods is one of the leading sporting goods retailer with about 415 stores mostly in the western states. It sells both brand-name and private label equipment, apparel, and footwear for both indoor and outdoor activitieslii .

One of the biggest downfalls the company faces is warm winter’s specifically in California that affects sales related to outdoor sports. Through a recent expansion of over 64 stores in the last 5 years, 41% of those stores were located in California. As the company looks to achieve economies of scale in terms of advertising and distribution, it also will look to implement new stores in smaller states that somewhat resemble Cabelas or Sport’s Authority locationsliii .

In summary, the last financial year for Big 5 Sports was successful as their 2015 same store sales increased by 1.3%. The biggest highlights adding value to the firm comes in their abilities over 2015 to manage their long term and current liabilities. Their overall inventory levels decreased by 2.9% while also condensing their long term debt to around $58 million (down 17.3%)liv .

Hibbett Sports Inc. (HIBB) Hibbett Sports sells sports equipment, athletic apparel, and footwear in small to midsized markets. The company operates in more than 30 states with more than 925 locations generally located near a Wal-Mart. The stores main strategy is location –sticking with communities of about 25,000 to 75,000 people. These are towns where it can top local retailers without drawing the attention of large-market sporting goods store competitorslv.

Modell’s Sporting Goods Headquartered in the heart of New York City, Modell’s is currently attributed to having a 1.5% market share within the sporting goods industry. Since inception in 1889, Modell’s has competed with small players within the industry while being privately owned. The store only operates about 160 stores in 10 stateslvi.

The company is aiming to market itself as the most consumer friendly chain within the industry. Throughout the last couple years the store has taken more initiatives to recruit prized athletes in which to market its products over the Sports Authority and Dick’s. To date, it is the only sporting goods store that has volunteered or been accepted to have their CEO appear on “Undercover Boss”. The company is much more active within the community as their Team Weeks Program has donated over $5 million in the process of buying uniforms for youth athletic teamslvii .

Recently Modell’s has been mentioned in the media for the progressing programs related to Customer Data Protection. They have negotiated terms with an infrastructure based company by the names of Cyhport. The systems being put in place will improve the company's overall integration within POS and also accessibilities related to enterprise system managementlviii .

14

Competitive Strategy DKS' competitive strategy can be described as broad differentiation. DKS' broadly defines their target customer as "sporting good consumers, from the beginner to the sports enthusiast". This classification is broad in the sense that customers with varying levels of sports abilities must be satisfied using different approaches. Most of the competitors that we chose as DKS' peer group, namely Big 5 Sporting Goods (BGFV), Cabela's Inc. (CAB), Hibbet Sports (HIBB) and Sportsman's Warehouse Holdings, Inc (SPWH), have similar definitions for their target customer. These firms target individuals ranging from beginners to experienced athletes. DKS and their competitors takes many measures to differentiate their product offerings. DKS management stressed the important of offering a broad array of products from each of their brands as opposed to simply carrying the leading brands, setting them apart from traditional, large sporting goods stores. Additionally, DKS leverages its relationships with vendors to offer exclusive products and brands. Offering exclusive products is one of the best ways to differentiate oneself in the sporting goods industry. Many of DKS competitors, such as CAB, utilize a similar strategy. CAB offers exclusive products from leading brands while also carrying their own proprietary brand, Cabela’s. Another approach to differentiation is through the layout of brick-and-mortar stores. DKS operates over 700 brick-and-mortar stores but has recently remodeled 5 of their stores to their new Specialty Store Concept. This concept will combine DKS with a Field and Stream store to offer the customer a diverse shopping experience. Finish Line (FINL), another member of DKS’ peer group, differentiates themselves through their store-within-a-store model. This model extends the company’s name to many shops within department stores such as Macy’s.

15

Appendix D

Source: Company Data

16

1.60% 1.70% 1.80% 1.90% 2.00% 2.10% 2.20% 2.30% 2.40% 2.50%0 17.14% 18.12% 19.14% 20.20% 21.30% 22.45% 23.63% 24.87% 26.16% 27.50%

1.00% 18.19% 19.19% 20.21% 21.28% 22.39% 23.54% 24.74% 25.99% 27.28% 28.64%2.00% 19.27% 20.27% 21.30% 22.38% 23.50% 24.66% 25.86% 27.12% 28.43% 29.79%3.00% 20.36% 21.37% 22.41% 23.50% 24.62% 25.79% 27.01% 28.28% 29.59% 30.97%4.00% 21.47% 22.49% 23.54% 24.63% 25.77% 26.95% 28.18% 29.45% 30.78% 32.17%5.00% 22.60% 23.63% 24.69% 25.79% 26.94% 28.13% 29.36% 30.65% 31.99% 33.39%6.00% 23.75% 24.79% 25.86% 26.97% 28.13% 29.33% 30.58% 31.87% 33.23% 34.64%7.00% 24.93% 25.97% 27.05% 28.17% 29.34% 30.55% 31.81% 33.12% 34.48% 35.91%8.00% 26.12% 27.17% 28.26% 29.40% 30.57% 31.80% 33.07% 34.39% 35.77% 37.20%9.00% 27.34% 28.40% 29.50% 30.64% 31.83% 33.07% 34.35% 35.68% 37.07% 38.52%

10.00% 28.57% 29.65% 30.76% 31.91% 33.11% 34.36% 35.65% 37.00% 38.41% 39.87%11.00% 29.83% 30.92% 32.04% 33.21% 34.42% 35.68% 36.99% 38.35% 39.77% 41.25%12.00% 31.12% 32.21% 33.35% 34.53% 35.75% 37.02% 38.35% 39.72% 41.15% 42.65%13.00% 32.43% 33.53% 34.68% 35.87% 37.11% 38.40% 39.73% 41.12% 42.57% 44.08%14.00% 33.76% 34.88% 36.04% 37.25% 38.50% 39.79% 41.14% 42.55% 44.01% 45.54%15.00% 35.12% 36.25% 37.43% 38.64% 39.91% 41.22% 42.59% 44.01% 45.49% 47.03%16.00% 36.51% 37.65% 38.84% 40.07% 41.35% 42.68% 44.06% 45.49% 46.99% 48.55%

Terminal Rate

Gro

wth

Rat

e

Sensitivity Analysis

Appendix E

17

2012 2013 2014 2015F 2016F 2017F 2018F 2019FASSETSCURRENT ASSET

Cash and cash equivalents 345,214$ 181,731$ 221,679$ 273,683$ 392,403$ 437,151$ 403,908$ 346,063$ Receivable, net 50,362 68,054 94,585 82,391$ 89,097$ 96,350$ 104,192$ 112,673$ Inventories, net 1,096,186 1,232,065 1,390,767 1,449,606 1,567,600 1,695,199 1,833,183 1,982,400 Other current assets 104,127 138,221 143,353 169,483 200,376 236,900 280,082 331,135

Total current assets 1,595,889 1,620,071 1,850,384 1,975,163 2,249,477 2,465,600 2,621,366 2,772,271 Net PP&E 840,135 1,084,529 1,203,382 1,444,352 1,733,575 2,080,713 2,497,363 2,997,445 Intangible assets, net 98,903 98,255 110,162 110,162 110,162 110,162 110,162 110,162 Goodwill 200,594 200,594 200,594 200,594 200,594 200,594 200,594 200,594

Other assets 152,286 68,038 71,676 97,333 79,016 82,675 86,341 82,677 Capitalized Operating Leases - - 96,330 96,330 96,330 96,330 96,330 96,330

Total other assets 1,291,918 1,451,416 1,585,814 1,852,441 2,123,347 2,474,144 2,894,460 3,390,878 TOTAL ASSETS 2,887,807$ 3,071,487$ 3,436,198$ 3,827,605$ 4,372,824$ 4,939,744$ 5,515,826$ 6,163,149$

LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES

Accounts payable 507,247$ 562,439$ 614,511$ 657,348$ 710,855$ 768,716$ 831,288$ 898,952$ Other current liabilities 493,521 440,148 504,322 563,352 609,207 658,795 712,419 770,408

Total current liabilities 1,000,768 1,002,587 1,118,833 1,220,700 1,320,062 1,427,511 1,543,707 1,669,360 LONG-TERM LIABILITIES Other long-term debt and leasing obligations 7,762 6,476 102,243 101,730 101,262 100,834 100,444 100,087

Other liabilties 291,953 370,245 479,227 380,475 409,982 423,228 404,562 412,591 Total long-term liabilities 299,715 376,721 485,140 385,875 414,914 427,733 408,676 416,348

TOTAL LIABILITIES 1,300,483 1,379,308 1,603,973 1,606,575 1,734,976 1,855,244 1,952,382 2,085,708

STOCKHOLDERS' EQUITYPreferred Stock - - - - - - - - Common Stock 981 961 932 932 932 932 932 932 Class B Stock 249 249 249 249 249 249 249 249 Treasury Stock (199,958) (455,512) (655,469) (655,469) (655,469) (655,469) (655,469) (655,469) Additional paid-in capital 874,236 958,943 1,015,404 1,015,404 1,015,404 1,015,404 1,015,404 1,015,404 Retained earnings 911,704 1,187,514 1,471,182 1,859,986 2,276,805 2,723,457 3,202,401 3,716,398 Accumulated other comprehensive (loss) income 112 24 (73) (73) (73) (73) (73) (73)

Total stockholder's equity 1,587,324 1,692,179 1,832,225 2,221,029 2,637,848 3,084,500 3,563,444 4,077,441 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 2,887,807$ 3,071,487$ 3,436,198$ 3,827,605$ 4,372,824$ 4,939,744$ 5,515,826$ 6,163,149$

Balance Sheet Pro Forma (in thousands)

Appendix F

18

2012 2013 2014 2015F 2016F 2017F 2018F 2019F

Net sales 5,836,119$ 6,213,173$ 6,814,479$ 7,369,159$ 7,968,989$ 8,617,643$ 9,319,096$ 10,077,645$ COGS 3,998,956 4,269,223 4,727,813 5,075,194 5,488,301 5,935,034 6,418,129 6,940,548

GROSS PROFIT 1,837,163 1,943,950 2,086,666 2,293,965 2,480,688 2,682,609 2,900,966 3,137,097 SG&A 1,297,413 1,386,315 1,502,089 1,635,606 1,768,740 1,912,711 2,068,400 2,236,763 Pre-opening expenses 16,076 20,823 30,518 25,999 28,116 30,404 32,879 35,555

INCOME FROM OPERATIONS 523,674 536,812 650,389 728,690 780,162 835,824 896,017 961,109 Impairment of available-for-sale investment 32,370 - - - - - - - Interest expense 6,034 2,929 3,215 4,059 3,401 3,558 3,673 3,544 Other income (4,555) (12,224) (5,170) (8,614) (9,315) (10,073) (10,893) (11,779)

INCOME BEFORE INCOME TAXES 489,825 546,107 652,344 733,244 786,076 842,339 903,237 969,345 Income taxes 199,116 208,509 211,816 279,366 299,495 320,931 344,133 369,320

NET INCOME 290,709$ 337,598$ 440,528$ 453,878$ 486,581$ 521,408$ 559,104$ 600,024$

Capitalize Operating Lease Adjustment 96,330 96,330 96,330 96,330 96,330 96,330

Income Statement Pro Forma (in thousands)

Appendix G

19

2012 2013 2014 2012 2013 2014 2012 2013 2014

Revenue 940,490 993,323 997,860 1,443,365 1,670,410 1,820,586 818,700 851,965 913,486

EBITDA 23,770 45,682 23,508 71,473 76,903 81,993 102,784 99,856 101,863

Liquidity

Current Ratio 1.93 2.51 2.18 3.67 2.93 2.69 2.71 3.54 3.48

Quick Ratio 0.17 0.15 0.17 1.80 1.27 0.89 0.79 0.92 1.04

Cash Ratio 0.05 0.05 0.07 1.69 1.18 0.76 0.65 0.72 0.87

Profitability

Gross Profit Margin 32.19% 33.09% 32.05% 33.54% 32.75% 32.03% 36.51% 36.30% 35.76%

ROA 2.76% 4.77% 2.57% 10.06% 9.33% 9.65% 5.03% 4.24% 4.06%

ROE 15.80% 24.86% 12.91% 13.89% 13.23% 13.92% 30.35% 23.31% 22.66%

Financial Leverage

Debt to Equity 0.3165 0.2421 0.3521 0.0000 0.0000 0.0000 0.0119 0.0106 0.0107

Debt to Assets 0.1237 0.1010 0.1481 0.0000 0.0000 0.0000 0.0057 0.0069 0.0071

Interest Coverage 11.7947 27.1788 15.1020 0.0000 0.0000 0.0000 637.3352 572.3719 375.1365

2012 2013 2014 2012 2013 2014 2012 2013 2014

Revenue 526,942 643,163 660,003 2,778,903 3,205,632 3,200,219 1,301,680 1,472,899 1,518,431

EBITDA 59,039 70,716 66,252 296,023 367,229 336,036 110,618 132,077 121,930

Liquidity

Current Ratio 2.22 1.89 1.74 3.21 4.48 2.80 2.75 3.07 2.58

Quick Ratio 0.59 0.08 0.09 0.23 0.22 0.10 0.72 0.52 0.45

Cash Ratio 0.56 0.01 0.01 0.20 0.18 0.07 0.63 0.43 0.36

Profitability

Gross Profit Margin 30.86% 32.22% 32.61% 36.34% 36.76% 35.66% 33.89% 34.23% 33.62%

ROA 16.85% 9.70% 5.09% 3.02% 3.51% 2.63% 7.54% 6.31% 4.80%

ROE -67.09% -17.96% -43.99% 12.61% 13.97% 11.10% 1.11% 11.48% 3.32%

Financial Leverage

Debt to Equity 2.9827 2.1486 6.3815 0.2446 0.2061 0.2749 0.2446 0.2061 0.2749

Debt to Assets 0.7280 1.0225 0.5789 0.0571 0.0504 0.0640 0.0571 0.0504 0.0640

Interest Coverage 8.4593 2.3592 1.9970 13.7007 16.5352 15.3555 11.7947 16.5352 15.1020

Big 5 Sporting Goods

Sportsman's Warehouse Peer Group AverageCabela's

Finish Line Hibbett

Appendix H

20

18.31% 19.95% 18.79% 20.44%

18.45% 16.90% 15.69% 14.72%

0.10 0.11 0.10 0.12 1.82 1.82 1.88 1.72

0.11 0.11 0.10 0.10 1.66 1.60 1.55 1.51

4.98% 5.43% 5.05% 6.16% 2.02 2.02 1.98 1.93

6.11% 6.05% 6.00% 5.95% 1.82 1.74 1.69 1.64

X

ROE

ROA Leverage (Total Assets/Equity)

X

Margin (Net Income/Sales) Turnover (Sales/Total Assets)

2012 2013 2014 2015F

2016F 2017F 2018F 2019F

Legend

Appendix I

21

Sources i. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

ii. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

iii. “Company Investor Presentation.” 15 Oct. 2015. Dick’s Sporting Goods, Inc.

iv. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

v. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

vi. “Dick’s Sporting Goods Inc Ownership Summary.” n.d. Nasdaq. 05 Jan. 2016.

vii. “The Budget and Economic Outlook: 2016 to 2026.” 26 Jan. 2016. Congressional Budget Office. 05 Jan. 2016.

viii. “The Budget and Economic Outlook: 2016 to 2026.” 26 Jan. 2016. Congressional Budget Office. 05 Jan. 2016.

ix. “Industry Report 45111 Sporting Goods Stores in the US.” n.d. IBISWorld. 05 Jan. 2016.

x. “Industry Report 33992a Athletic & Sporting Goods Manufacturing in the US.” n.d. IBISWorld. 05 Jan. 2016. xi. “Industry Report 42391 Sporting Goods Wholesaling in the US.” n.d. IBISWorld. 05 Jan. 2016.

xii. “State & County QuickFacts.” n.d. United States Census Bureau. 05 Jan. 2016.

xiii. “Nike Will Replace Adidas as N.B.A.’s Official On-Court Apparel Provider.” 10 June 2015. The New York Times.

05 Jan. 2016.

xiv. “Dick’s Sporting Goods and The U.S. Olympics Committee Announce Partnership.” 10 Feb. 2015. Team USA. 05

Jan. 2016.

xv. “Industry Report 45111 Sporting Goods Stores in the US.” n.d. IBISWorld. 05 Jan. 2016.

xvi. “Industry Report 45111 Sporting Goods Stores in the US.” n.d. IBISWorld. 05 Jan. 2016.

xvii. “Industry Report 45111 Sporting Goods Stores in the US.” n.d. IBISWorld. 05 Jan. 2016.

xviii. “Industry Report 45111 Sporting Goods Stores in the US.” n.d. IBISWorld. 05 Jan. 2016.

xix. “Industry Report 45111 Sporting Goods Stores in the US.” n.d. IBISWorld. 05 Jan. 2016.

xx. “Dick’s shares rise on Sports Authority woes.” 21 Jan. 2016. CNBC. 01 Feb. 2016.

xxi. “Moody’s downgrades Sports Authority’s CFR to Caa3 on missed interest payment.” 20 Jan. 2016. Moody’s. 01

Feb. 2016.

xxii. “Dick’s shares rise on Sports Authority woes.” 21 Jan. 2016. CNBC. 01 Feb. 2016.

xxiii. Response to team questions from DKS Management

xxiv. "Dick's Sporting Goods (DKS) Edward W. Stack on Q2 2015 Results - Earnings Call Transcript." Seeking Alpha. 18

Aug. 2015. Web. 03 Feb. 2016.

xxv. "Dick's Sporting Goods (DKS) Edward W. Stack on Q3 2015 Results - Earnings Call Transcript." Seeking Alpha. 17

Nov. 2015. Web. 03 Feb. 2016

xxvi. "Hibbett Sports' (HIBB) CEO Jeff Rosenthal on Q3 2015 Results - Earnings Call Transcript.” Seeking Alpha. 21

Nov. 2015. Web. 03 Feb. 2016

xxvii. "Cabela’s (CAB) Thomas L. Millner on Q3 2015 Results - Earnings Call Transcript.” Seeking Alpha. 22 Oct. 2015.

Web. 03 Feb. 2016

xxviii. Garcia, Tonya. “Retail Sector down after Holiday Same-store Sales Results, Outlook Announcements, Analyst

Downgrades.” MarketWatch. 08 Jan. 2016. Web. 05 Feb 2016.

xxix. Damodaran, Aswath, Dr. "Country Default Spreads and Risk Premiums." Jan. 2016. Web. 03 Feb. 2016.

xxx. Damodaran, Aswath, Dr. "Estimating a Synthetic Rating and Cost of Debt." Web. 03 Feb. 2016.

xxxi. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xxxii. “Industry Report 45111 Sporting Goods Stores in the US.” n.d. IBISWorld. 05 Jan. 2016.

xxxiii. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xxxiv. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xxxv. Investopedia

xxxvi. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xxxvii. “Brand Names Just Don’t Mean as Much Anymore.” Time. 01 Feb. 2016.

xxxviii. “Brand Names Just Don’t Mean as Much Anymore.” Time. 01 Feb. 2016.

xxxix. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xl. Swayne, Linda E. “Encyclopedia of Sports Management and Marketing.”

xli. Milne, George R. and Mark A. McDonald. “Sport Marketing: Managing the Exchange Process.”

xlii. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xliii. “Company Investor Presentation.” 15 Oct. 2015. Dick’s Sporting Goods, Inc.

22

xliv. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xlv. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xlvi. “DKS 10-K.” 31 Jan. 2015. Dick’s Sporting Goods, Inc.

xlvii. “The Sports Authority Inc.” Hoovers. 1 Feb. 2016.

xlviii. “Dick’s shares rise on Sports Authority woes.” CNBC. 1 Feb. 2016.

xlix. “Sports Authority slashes 100 jobs.” The Denver Post Business. 29 Jan. 2016.

l. “Cabela’s Incorporated.” Hoovers. 1 Feb. 2016.

li. “Cabela’s Fields Bid Interest, Weigh Options for Company.” Bloomberg Business. 1 Feb. 2016.

lii. “Big 5 Sporting Goods Corp.” Hoovers. 1 Feb. 2016.

liii. “Big 5 Sporting Goods Corp.” Hoovers. 1 Feb. 2016.

liv. “Big 5 Sporting Goods Corp.” Hoovers. 1 Feb. 2016.

lv. “Hibbett Sports, Inc.” Hoovers. 1 Feb. 2016.

lvi. “Modell’s Enhances Customer Data Protection with Cyphort Defense System.” Footwear News. 1 Feb. 2016.

lvii. “Modell’s Enhances Customer Data Protection with Cyphort Defense System.” Footwear News. 1 Feb. 2016.

lviii. “Modell’s Enhances Customer Data Protection with Cyphort Defense System.” Footwear News. 1 Feb. 2016.

23

Disclosures: Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report do not hold a financial interest in the securities of this company.

The author(s), or a member of their household, of this report do not know of the existence of any conflicts of interest that might bias the

content or publication of this report.

Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue.

Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.

Market making:

The author(s) does not act as a market maker in the subject company’s securities.

Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to

be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The

information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute

investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a

recommendation by any individual affiliated with the CFA Society of Pittsburgh, CFA Institute or the CFA Institute Research Challenge with

regard to this company’s stock.

CFA Institute Research Challenge