Sporting Goods Stores Senior Analyst: Jeevan Parameswaran Junior Analysts: Fred Schmidt, Ankit Sinha, Gurvir Dhaliwal, Shann Chan, Sara Li, Hanumita Gupta, Emili Nirmala, Stephanie Hyun, Amanda Lee

Sporting Goods Stores Industry  The Sporting Goods Stores industry seems to be on its way to recovery but certain trends and risks may have potentially adverse effects on the industry. Some major trends and risks are:  Consumer demand remains strongly tied to macroeconomic factors  Low growth in sports participation rates, a sign of slow demand growth  Industry’s improving inventory turnover, a signal of its increasing focus on efficiency  The Sporting Goods Stores industry seems to be on its way to recovery but certain trends and risks may have potentially adverse effects on the industry. Some major trends and risks are:  Consumer demand remains strongly tied to macroeconomic factors  Low growth in sports participation rates, a sign of slow demand growth  Industry’s improving inventory turnover, a signal of its increasing focus on efficiency Executive Summary Bearish

Products are sourced from sporting goods manufacturers and wholesalers and then sold to the general public via retail stores Comprises establishments primarily engaged in retailing new sporting goods Sporting Goods Stores NAICS Bicycles, camping equipment, exercise and fitness equipment, apparel, footwear and other sporting goods and accessories Industry Definition

Market Share

Key Distribution Channels Sporting Goods Stores 29.4% Online/Internet Key Distribution Channels 14% Specialty Sport Shops 17.7% Despite having a relatively low share of the market at present, we believe the internet will become the favored distribution channel in the near future However, customers who favor a more personalized experience will continue to buy from sporting goods stores Our view

Business Model Overview Small Stores  Focus on niche  Small store sizes, target small metropolitan areas Big Stores  Focus on high priced, private brand sales to obtain higher margins  Mass marketing  Maintain strong customer and supplier relationships..

Trend 1: Sports Participation Rates Industry Growth Resumes in 2011 Macroeconomic Impact Weak Growth in Sports Participation Rates

Sports Participation Rates Participation levels posted a 3.3% decline in 2008 and has since shown weak signs of further growth decreasing from 0.5% to flat growth in 2012 Participation growth is expected to remain weak in the near future Proportion of participants remain strongly male over span However there is potential for growth in the female demographic as shown by a growing proportion of female participants post 07 Firms in the industry are increasingly targeting females

Trend 2: Macroeconomic Impact Industry Growth Resumes in 2011 Weak Growth in Sports Participation Rates Macroeconomic Impact

Sporting goods are discretionary spending, demand is cyclical i.e. depends heavily on overall economic conditions We believe personal consumption expenditures will continue to improve at a slow rate Slow GDP growth implies slow recovery of economic well-being We believe GDP growth is likely to slow further or decline as the fiscal cliff nears

Trend: Industry Growth Resumes in 2011 Weak growth in sports participation rates Macroeconomic Impact Industry Growth Resumes in 2011

Industry Performance Comparison of weighted and unweighted industry average stock performance shows wide disparity When industry average was weighted by market cap, industry showed dramatic rise over the past year, post-recession. Big players in the sporting goods industry are driving the surge, smaller players are struggling/ falling behind Unweighted Weighted

Key Companies Dick’s Sporting Goods(DKS) Foot Locker(FL) FL has shown negative YoY revenue growth from period, recovering from a 7% drop in revenue in 2010 to a 4% rise in 2011 DKS has enjoyed positive YoY revenue growth consistently during the same period and has continued upward post 2010, posting a 7% revenue growth We believe this reflects Dick’s ability to better adapt to changing economic conditions CAGR=15.1% CAGR=2.2%

Key Ratios Inventory turnover has generally been stable post 2008 However, inventory turnover is considerably lower than other retail industries We believe the industry is not as efficient as it could be Increasing current ratio post 2009 points toward increasing focus on positive liquidity We believe the industry is better prepared to face economic shocks as a result of this

Risk Factors ) Inventory Management Failure to predict consumer demand could adversely affect margins and inventory turnover 2) Labor Intensity Greater exposure to labor market issues 1.External Competition Online Retailers “Superstores”

Industry Outlook Sporting Goods Stores vs Internet Sales Sporting goods stores to continue losing sales to internet Within a 5 year horizon, we believe revenue growth is likely to stagnate or slowly decline

Industry Recommendation Cons Pros  Exposure to a fragile economy  Modest growth in consumption expenditure  Sluggish sports participation rates  Industry not adapting sufficiently to growing online sales  Exposure to a fragile economy  Modest growth in consumption expenditure  Sluggish sports participation rates  Industry not adapting sufficiently to growing online sales  Improving liquidity, industry players will be better able to deal with any sudden demand shocks  Some customers may continue to favor personalized experience at sporting goods stores  Improving liquidity, industry players will be better able to deal with any sudden demand shocks  Some customers may continue to favor personalized experience at sporting goods stores Underweight We reiterate our underweight rating as we view the industry as being exposed to too many external risks with limited organic growth potential. Conclusion

Key Financials Description Market Cap(bn)P/EROE % LT Debt to Equity(%) Price to Book Net Profit Margin (mrq) EV/EBIT DA Sporting Goods Stores Big 5 Sporting Goods Corp Cabela's Incorporated Dick's Sporting Goods Inc Hibbett Sports, Inc Sport Chalet Inc.0.026NA Foot Locker

Back up Slides

Customer Demographics Most Popular Sports 2011

Fiscal Cliff Not So Good Temporary extension of tax cuts Bad Upper Income Tax Cuts Expire Ugly Congress Fails To Address Fiscal Cliff Likely return to recession within a year Stocks predicted to take a hit Timeline What it means for Sporting Goods Stores? Fall in real disposable income Higher unemployment Higher savings Shrinking earnings

Frequency of Sporting Goods Purchases Emphasize quality Equipment is meant to last Brand loyalty

Review Of 2011 Sales Athletic and sports equipment- ($27.5bn) +3% Athletic and sport footwear- ($18.4bn) +5% Athletic and sport clothing ($9.7bn) +3%

Industry Overview » High Barriers To Entry » High Sunk Costs » Mature Industry Potential New Competitors Customers Suppliers Substitutes Competitors in the Industry » High Buyer Power » Low product differentiation » Large Supplier Market Capitalization » Monopolies (Nike, Adidas) » High Threat of Product Substitutes » Attractive prices and convenience provided by online retailers and “superstores” » Main Players compete fiercely on price and product authenticity