Dick's $2.4B Foot Locker Takeover - Bold Move or Strategic Blunder?

Dick's Sporting Goods is set to acquire foot locker for $2.4 billion, according to CNBC.

Dick's Sporting Goods said Thursday that it plans to acquire rival Foot Locker as it looks to expand its international presence, win over a new set of consumers and corner the Nike sneaker market.

Under the terms of the agreement, Dick's will use a combination of cash on hand and new debt to acquire foot locker for $2.4 billion.

Footlocker shares soared more than 80% after the deal was announced the Thursday.

However, shares of Dick's fell slightly, or roughly 15%, as investors worried about the impact the merger could have on financial results.

One analyst from TD Cowan even said that the deal was a, quote, strategic mistake as it downgraded shares of Dick's to hold from buy.

Michael, I'm going to go to you first.

Are you pro or con on Dick's acquisition of Foot Locker?

So funny.

My, my thoughts on this evolve almost to the minute.

When I first read the headline, I was actually very surprised and I hated it.

I.

I really thought, why?

Why?

I think Foot Locker has issues.

I think they're very fragmented.

They're very reliant on Nike.

And you want to talk about a gorilla in the marketplace.

I mean, Nike can seal your fate within minutes, either positive or negative.

And I also think that the sneaker game is a very fickle game in regards to the consumer interaction.

And although there's a lot of spending power behind it, you have to be right with the style, skews, direction that you've chosen.

And I think Foot Locker, based on the number of stores, based on the country saturation, I think it's a very, very difficult business to monitor and to manage and to run effectively.

Now.

They've done a decent job.

They've had good times, they've had bad times.

But it is a very, very specific type of business to run, which you have these third parties that it's basically out of your control.

Your destiny may be out of your control.

It's been highly publicized.

When Nike wanted to pull out of the market, Foot Locker's business had a precipitous drop almost immediately.

When Nike wanted to expand the marketplace and I'll call it use Foot Locker to gain market share, it was great.

But the minute that wasn't great, it was a problem for Footlocker.

So I think there's some huge inherent risks for Dicks.

So that's number one.

That's why I hated it.

Then I started doing a little bit more and I flipped.

So I started doing A little bit more research on the size and scale of Dicks, and I was a little mistaken in understanding how large they are.

Yep, a pretty big entity.

I think they're approaching $20 billion.

Right.

So at that size growth, organic growth is difficult.

Right.

One up 1% comp, down 1% comp, you're kind of happy.

But if you're down 5% comp in a tough year, that is a massive hit to your revenue.

So I like the fact that they actually acquired an adjacent business that's going to layer in a multibillion dollar revenue stream.

I thought that was a very easy pickup.

And in rereading the releases, either the CFO or the CEO said we are going to add in, I think, 4.5% comp sales in the first year, which I liked a lot.

So it's so number three.

My conclusion is the only way they will be successful with this is not integrating it into the Dick's business.

It's sort of like a standal own, let Foot Locker run.

If there's some back of the house IT or supply chain efficiencies you could create, great.

If you start to sort of matrix it into the Dick's organization, I think that's a massive disaster.

They should just leave it as its own entity, Let it run on its own, treat it as its own thing.

Look for some economies to scale, but almost insulate and have it do that.

And if they can do that, it may be very successful for them.

Yeah, that.

I think what you're saying makes a lot of sense.

Michael and Chris Walton, I would go to you too and ask, like, do you think that this also is helping Dick's kind of eliminate some competition in the field?

And then maybe even if they're a separate entity or they're, you know, Dick's is just able to kind of keep the business separate, but maybe take some of that Nike relationship into Dick's Stuff stores.

Like, will that help this position for Dick's Sporting Goods?

Yeah, I mean, that's, That's.

We were joking before we started this podcast and I had kind of a potentially hot take, although I don't think it's that hot that I wanted to get Michael and Chris's opinion to see if they'd laugh me out of the room on this.

But I mean, the thing I like about this deal is, like, if I just go with the.

Go into the realm of, like, what if Dick's just shut these stores down, right.

And the $5 billion in revenue that Foot Locker generates a portion of that goes to Dick's just through inertia.

Then when I think of the annuity on that volume year over year, the $2.4 billion seems like they got a steal.

Yeah.

So I think minimally you approach it, like Michael said, where you try to operate them.

If it doesn't work.

Like, I feel like the worst case scenario here isn't actually that bad in the long run.

So for that reason, I like this move a lot.

But I don't know, I might.

I might be crazy in my math on that.

But I'm curious what the a.

M.

Guys think.

It's the old retail holy grail of does one plus one equal two or three?

Everybody always tries to say one plus one equals three.

But generally when you do that, you don't capture even 1 of the sale.

So that 2, 2 and change.

Billion, 2.4 billion.

Whatever their actual revenue number is, if Dick's did close all their stores could end up being a billion dollars or maybe a little bit even below a billion dollars.

Now, if it's profit, the margin advantages, you get work then, sure, it's awesome, but I think it's a little scary.

And the other key piece, I love the hot take, by the way.

I think it's a very interesting thing, but you made me think too.

Dick's now is wildly important to Nike.

But now Nike's wildly or Dicks is now wildly important.

It's like this symbiotic relationship flipped a little bit.

And it's sort of like whoever is the strongest at the time is going to win.

And if you read the tea leaves, Nike seems like they're going through one of their sort of macro.

Not as strong as they normally are.

So Dicks could be sort of pounding their chest saying, we won here.

Now we're going to turn the screws on Nike.

But if history proves anything, nobody's turning any screws on Nike over the long term.

So I'd be a little bit afraid.

Afraid that all of my fortunes as Dicks and Foot Locker now are heavily saturated in Nike.

And, oh, by the way, all of the other big sneaker makers have all taken a page out of Nike's book.

Like Adidas, Puma, all of these people are doing the same thing that Nike used to do.

And it's going to be very interesting.

So I.

I mean, yeah, I think that's like looking at the edge of the cliff saying, okay, let's shut Foot Locker down and let's jump.

Love that.

It'll be interesting to see if that.

If that would if that would work.

Well, you also have JD Sports knocking down the door too.

And we just, yeah, the CEO Regis Schultz last week at World Retail Congress and they're taking a totally different approach with Nike.

Like they're going the storytelling route.

They're bringing brands in.

Dick's is just going for like how much can we, how much Nike can we pound in and out of this store right now?

And how do we get that to exceed expand shoppers into other categories of our store?

And I think JD Sports on the other side here, they're, they're coming in, they're, they have huge US expansion plans.

Like I think this, this hopefully will help solidify Dicks and Nike together in, in this option of we're ready to compete with you JD Sports.

But Chris Walton, jump in here quick and then we'll go to Chris Disa for the wrap.

I was just going to say like I think the one point that I, that I've been thinking about when Michael said, you know, does one plus one ever actually equal three?

I think the unique, unique thing about this is the shopping experience experience for at Foot Locker is very different than the shopping experience for Dicks.

Dicks is almost a standalone experience where, whereas Foot Locker is that mall based experience and so in theory where does the volume go over time?

Is, is I've been wrapped, trying to wrap my head around that.

Yeah.

And I think it, it presents different dynamics than a, than say if the acquirer was basically competing in the same trip and they're not in this case.

But yeah, I don't know.

Yeah.

Okay.

Christ, Issa.

The floor is yours, friend.

All all very interesting points.

I guess a few things to add.

One is, I do, I do agree with Michael that the businesses should be treated separately.

But I think, you know what is interesting is that while there are some kind of back of the house synergies, I also think because Dick's and Footlocker have two very different customers, there's opportunity to learn from each other and leverage your customer data and customer insights.

Also what's really interesting is Foot Locker has an international presence which Dick's does not.

So that could be an opportunity for growth.

But I think underpinning all of this is Foot Locker saw some major challenges.

If you recall, they set up, set up a, or set upon a path for a new strategy that kicked off in 2023 called Laces Up.

And two big pillars of that strategy were around supply chain improvement and inventory accuracy as well as the omnichannel experience for the customer.

Two critical pieces into, you know, kind of create long term value.

So the punchline here is that just because they're acquired, there can be a lot of great opportunity for both organizations.

However, they still have to, the leadership team still has to fix or improve upon bootlocker's core business.

Right.

Right.

Michael, you want to say something else?

One last quick thing that Chris just made me think of.

The question is, are they going to be on the right side of history?

When you look back with the massive change of the US Department store and mall model, the answer might be yes.

Right.

Because department stores are clear, clearly failing.

This could be the future where you have a huge base, you start to bring in complementary plugins, you let them do their own thing, you have them all have unique innovation as well as setting up multiple opportunities to shop for the customer.

It'll be very interesting to see how this one really works out.

Yeah, and that's why I made the point of Dicks could be very surgical about which stores they decide to keep open, given that phenomenon, so that the draft from the sales volume goes from one place to another.

Wow.

And Chris, you brought up good points too.

Like the retail media angle here.

They can.

That expands, you know, greatly across these two entities.

Dicks is a great omnichannel retailer, so they can probably bring that operational knowledge to Foot Locker as well.

So.