Investing in Sporting Goods Stocks

You might be surprised to learn that sporting goods stocks have thrived during the COVID-19 pandemic. Stay-at-home orders and social distancing protocols sparked a boom in sporting goods as people spent more time playing catch in the backyard and working out at home.

According to the U.S. Census Bureau, sales at sporting goods stores in 2020 increased by almost 20%, and revenue was up 31% in 2021 through October. While the boom won’t last forever, many sporting goods companies are heading into 2022 flush with cash and plenty of new customers.

Top sporting goods stocks

These are some of the best sporting goods stocks to buy right now:

Data source: Yahoo! Finance. Data current as of July 28, 2021.

1. Dick's Sporting Goods

Dick's is the undisputed leader of the sporting goods industry, finishing 2020 with 854 stores, which include Golf Galaxy and Field & Stream locations. While that's fewer locations than some of its peers, Dick’s superstores average about 50,000 square feet, making them much larger than the typical sporting goods store.

The company’s market dominance has been further cemented by a rash of bankruptcies in sporting goods retail, including filings by Gander Mountain, City Sports, and Bob's.

Before the COVID-19 pandemic, business had been mostly stagnant and the stock had underperformed the broad market, mainly due to stiff competition from online channels. But Dick's sales spiked during the pandemic, with comparable store sales in 2020 increasing year over year by 10%. Through the first three quarters of 2021, same-store sales surged 37%.

The company is investing in e-commerce and experiential in-store features such as baseball simulators and golf ball tracking technology. It also opened its first experiential retail superstore, called House of Sport, which includes a running track and a climbing wall.

With its financial status enabling it to stand out from other retailers, Dick's should continue to be the industry leader. However, the company could experience a deceleration in sales growth if demand for sporting goods slows as the economy recovers.

2. Big Five Sporting Goods

Big Five Sporting Goods is a popular chain in the Western U.S., with about half of its stores in California. Big Five’s stores generally occupy strip malls. With an average size of 11,000 square feet, they are smaller than Dick’s locations.

Big Five was struggling before the pandemic, but, like much of the sector, the company caught a huge tailwind from the crisis. Net income jumped almost 700% in 2020 due to strong revenue growth and cost-reduction initiatives. The company is investing in e-commerce, but the vast majority of its sales still come from its brick-and-mortar stores.

Big Five has aggressively raised its quarterly dividend payment from $0.05 before the pandemic to $0.25, and the company twice paid shareholders a $1 special dividend in 2021 from the recent windfall. While COVID-19 has provided a major boost for Big Five, it still needs to prove its stock is worth owning in a more normal economic environment.

3. Hibbett Sports

Hibbett Sports stores average about 6,000 square feet. Like Big Five, its stores are typically found in strip malls. The company targets underserved markets, which it believes provide significant cost benefits because it faces less competition and can take advantage of cheaper real estate. It also seeks to open stores in close proximity to each other to maximize the efficiency of the company's marketing and logistics.

The Alabama-based company's stores are predominantly located in the Southern U.S. Hibbett's comparable-store sales were up 30% through the first half of 2021 and 63% from 2019 levels.

The company recently expanded its authorization of share buybacks from a maximum of $300 million to $800 million, which means that it currently could repurchase more than half of its shares outstanding. Hibbett Sports posted record-level earnings per share of $5 in the first quarter of 2021, representing a year-over-year increase of 1,500% from the pandemic-afflicted first quarter of 2020. The growth rate moderated in the second quarter and will likely continue to do so as the economy recovers.

4. Callaway Golf

Like sporting goods retailers, golf businesses also experienced a boom during the pandemic since the sport is played outside and lends itself to social distancing. The increased interest in golf was key for Callaway since about half of its sales are from golf clubs.

In October 2020, Callaway announced plans to acquire Topgolf, which combines restaurant service with virtual golfing. The acquisition, finalized in the first quarter of 2021, adds a unique revenue stream that can help create brand loyalty to Callaway products. Topgolf also introduces more people to the game, increasing adoption and driving sales of golf equipment and related products.

Despite the increasing interest in recreational golf during the pandemic, Callaway's 2020 revenue declined by 7% due in part to sluggish sales in international markets. In 2021, the company was off to a strong start, with revenue up 80% through the first three quarters of the year, primarily because of the impact of TopGolf.

5. Acushnet Holdings

Acushnet is the parent company of Titleist, the leading golf ball maker, and FootJoy, the top golf shoe brand. That brand strength is central to the company's strategy, and it has shown discipline in resisting acquisitions and diluting focus from the two brands.

Acushnet says it is focused on serving dedicated golfers because people who are serious about the sport are the most consistent purchasers of golf products. Avid golfers are also most likely to spend money on premium golf products. Since golf balls are a consumable product, the company's performance is closely tied to the aggregate number of rounds of golf played.

The company hopes to grow by introducing new products, with a focus on innovation in balls, clubs, and footwear. In 2020, Acushnet's overall revenue declined year over year by 4%, but its results in the second half of the year were strong as lockdown measures were lifted and the demand for golf surged.

After a strong performance through the first three quarters in 2021, which included 32% revenue growth from 2019 levels, the company is on pace to deliver record revenue for the year.

6. Foot Locker

Foot Locker is the country's biggest athletic footwear retailer, with about 3,000 stores for its namesake brand and its Footaction, Champs Sports, and Sidestep locations. As a sneaker and apparel retailer, Foot Locker doesn't fit the exact definition of a sporting goods stock, but it is worth considering since people buying sports equipment need athletic clothing and shoes to wear.

More than half of Foot Locker's sales are of Nike (NYSE:NKE) products, with 75% of the company's purchases last year going to the sportswear giant. The company's special relationship with Nike is both a competitive advantage and a risk. Foot Locker can obtain unique product releases and team up with Nike on in-store experiences, but it also heavily depends on a single, powerful vendor.

Foot Locker has been shrinking its store base and focusing more on e-commerce and experiential retail, partly in response to the pandemic. Revenue in 2020 decreased by 5% as consumers generally avoided shopping malls. The business thrived in 2021 as consumers returned to brick-and-mortar stores. Sales were up 14% from 2019 levels through the first three quarters of the year, and adjusted earnings per share almost doubled.

Should you buy sporting goods stocks?

In general, demand for sporting goods is subject to forces outside of company control. Interest in golf, hunting, or basketball tends to fluctuate in ways these companies are unable to influence, and revenue growth in this mature sector is slow.

Still, a number of these companies have outperformed the market in recent years, even before the pandemic, which is a good sign that they could continue to beat the market. The best sporting goods companies are capitalizing on the transition to e-commerce and experiential retail. While sporting goods and sports stocks aren't going to offer the highest revenue growth, they can be reliable winners if bought for the right price.