iStock.com/martinrlee
Shares of Dick’s Sporting Goods fell about 15% on Thursday on news of its blockbuster deal to acquire Foot Locker, apparently due to investor concerns over turnaround prospects for the long-struggling sneaker chain.
Dick’s agreed to pay $24 per share, or $2.4 billion, a sizable premium compared to Foot Locker's closing price of $12.87 on Wednesday. Shares of Foot Locker soared 86% on the news. Dick's plans to keep its stores separate from Foot Locker's.
The move will enable Dick’s to reach new customers. Dick’s targets a middle- to upper-middle income customer buying gear for playing sports while Foot Locker targets a lower-income household, as well as a younger and more fashion-forward clientele.
Ed Stack, Dick’s’ executive chairman, said on an analyst call, “They’re in places that we’re not going to be able to find 50,000 square feet or 60,000 square feet [for a Dick’s store]. So, they’ve got stores and the consumer that we’re not going to get based on our real estate strategy.”
The deal would give Dick’s its first international presence, with a third of Foot Locker’s locations located outside the U.S.
Finally, the deal would more than double footwear revenue for Dick’s, strengthening its partnerships with Nike and Adidas as well as upstarts such as Hoka and On. Negotiating leverage will also be gained over vendors and landlords.
The merger is projected to deliver cost savings of $100 million to $125 million in the medium term through direct sourcing and procurement efficiencies and be accretive to earnings per share in the first full fiscal year after closing.
Critics see Dick’s taking on too much risk in acquiring Foot Locker, which has seen three straight years of sales decline.
Telsey Advisory Group's Joe Feldman wrote in a note, "The proposed transaction would mean acquiring a structurally challenged, mall-based retailer with 2,410 small-format stores worldwide… a heavy dependence on one brand [Nike]... and a weak operating margin of 2.5% in 2024 that would be dilutive to Dick's 11.0% in 2024."
In downgrading Dick’s shares to “Hold” from “Buy,” TD Cowen analyst John Kernan called the potential acquisition a “strategic mistake,” leaving Dick’s more exposed to streetwear and lifestyle fashion trends, mall-based retailing, and “smaller, more nimble sneaker retailers and marketplaces that are gaining share.” Kernan prefers Dick’s to be focused on House of Sport, its next-generation stores, and the GameChanger youth-sports app, which are “lower risk and higher return on capital investments than purchasing Foot Locker.”
Michael Lasser, at UBS, in a note cited risks around retail integrations, particularly when an outperformer acquires an underperformer, citing Dollar Tree and Family Dollar, General Parts and Advance Auto, Albertsons and Safeway, and Sears and Kmart.
Stack on the call said he expects Dick’s will improve Foot Locker’s results, citing footwear as a "core competency" at Dick’s as well as his confidence in Nike's new team. He said, “If we didn't see this clear line of sight to this or we thought that this was going to impact what we're able to do at Dick’s, we wouldn't be doing it.”