The retail landscape is littered with failed mega-mergers, but that’s not stopping Dick’s Sporting Goods from trying its own hand at a big deal.
The company announced on Thursday that it was buying the long-suffering Foot Locker retail chain for $2.4 billion in Dick Sporting Goods’ biggest-ever acquisition. The proposed deal would bring together two competitors that operate very differently: Foot Locker is a 2,400-store chain made up of mostly smaller locations in cities around the world with many stores in U.S. malls; Dick’s is comprised of roughly 800 big-box stores in suburbs, only in the U.S., and a strip mall fixture.
In theory, the deal allows Dick’s, a top performing company with recently slowing growth, to expand into new markets, go deeper into the sneaker boom, and increase its market share. Dick’s has been successful in making its stores popular destinations, with the expansion of its House of Sports locations that offer experiences like batting cages and outdoor playing fields. The company also has significant clout with suppliers like Adidas and other brands. As a top-notch operator with first class tech and inventory management, Dick’s could see a lot of upside if it can fix Foot Locker.
But it remains to be seen whether or not it can actually pull off that feat—and Wall Street has doubts. Dick’s shares were down 13% on Thursday morning, while Foot Locker shares nearly doubled on investor relief about the potential advantages for a long-declining stock.
The worry on Wall Street for Dick’s is that it has no experience turning around outside brands. There are also plenty of examples of strong, well-run retail brands buying a damaged rival and failing to fix it. Dollar Tree recently announced it was selling off Family Dollar for $1 billion, a fraction of the $9 billion it paid for it a decade ago. In 2017, Walgreen Boots Alliance reached a deal to buy 2,100 Rite Aid stores for $5.2 billion, but has since closed many stores. And Tapestry, a top-notch operator whose Coach brand is firing on all cylinders, is still trying to turn Kate Spade around eight years after buying it.
“In our view, there are countless examples of M&A destroying billions of dollars in value since we have covered the sector,” John Kernan, analyst at TD Cowen, wrote in a research note. “There is little to no precedence of M&A at scale creating value for shareholders” in this part of retail, he added. Kernan added yet another potential risk around the acquisition: if the Foot Locker sale goes through, it would increase Dick’s exposure to Nike from 24% to 38% as the shoe company faces its own difficulties.
GlobalData, a research firm, estimates that Dick’s has an 11.1% share of the U.S. sporting goods market, up 1.6 percentage points from before the pandemic. Foot Locker has about 4.3%, giving Dick’s, which will keep the Foot Locker brand and chain operating separately, a new avenue for growth in the States, but also abroad. But adding their market shares is more than just a matter of simply arithmetic. “If the purchase goes through, Dick’s would be inheriting a business that remains on the back foot,” says GlobalData’s managing director Neil Saunders.
Foot Locker, led by the well-regarded Mary Dillon, a CEO who previously turned Ulta Beauty into its category’s leader, has struggled to get back on track for years. Under Dillon, Foot Locker has been renovating a large portion of its store fleet, updated its rewards program and sought to get its relationship with Nike back on track. Foot Locker shares fell about 75% between Dillon’s arrival and right before news of the impending deal was broken Wednesday by the Wall Street Journal.
Dick’s CEO Lauren Hobart has been successful in her efforts to improve the retailer’s e-commerce capabilities and also invest in its physical stores. But no matter how talented an executive is, the turnaround of a damaged brand is difficult, distracting and offers no guarantees.
“Can Dicks’ management succeed in improving Foot Locker’s fortunes where a respected and successful executive (Mary Dillon) was unable?,” said John Zolidis of Quo Vadis Capital, an equity research firm. “The Dick’s and FL combination threatens to create even more banner conflict, overlapping real estate, increased dependence on Nike and adds significant operational complexity.”
In other words, Wall Street says don’t do it, Dick’s.
