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Investors are often hesitant to bet on a company turning itself around. But how about two companies? That really requires a leap of faith. Dick’s Sporting Goods, whose shares fell 14 per cent as it announced a $2.4bn swoop on Foot Locker, will need to pull off some fancy footwork, and so will one of its major suppliers: Nike.
Dick’s is making a pricey bet. Its cash offer of $24 a share represents a 65 per cent premium to Foot Locker’s 90-day average, and a premium of almost 90 per cent to Wednesday’s closing price. Dick’s will need to hit the $125mn upper end of projected cost cuts to even roughly recover the premium it is offering on the spot price, Lex calculates.
The first challenge will be to spruce up the down-at-the-heel sneaker retailer: Foot Locker’s revenue has shrunk for three consecutive fiscal years. With more than 2,400 stores worldwide, reversing that would be a tall order even in good times. Trade war uncertainty and weakening consumer sentiment makes it even more so. Nearly all of the footwear sold in the US is imported, with China and Vietnam accounting for two-thirds of the goods.
Dick’s presumably hopes bigger is better when it comes to defending itself against tariff uncertainty. If the merger is approved, footwear will generate nearly half of Dick’s total sales — up from 28 per cent last year. Increased scale will give it more leverage and greater buying power over key brands, most notably Nike. Combined, Dick’s and Foot Locker would account for 30 per cent of Nike’s North American wholesale business, according to Citigroup. They will have even more power since Nike is pivoting back to wholesale retail after its direct-to-consumer strategy failed to gain traction.
Yet retail mergers in the US can prove surprisingly complex. Dollar Tree ended its decade-long union with Family Dollar earlier this year when it sold the troubled discount chain for $1bn, just a fraction of the $9bn it paid. Capri Holdings offloaded Versace to Italian luxury conglomerate Prada for $1.4bn, a little over half the purchase price in 2018. Rival Tapestry sold its Stuart Weitzman shoe brand to Caleres for $105mn, 20 per cent of what it paid.
Dick’s customers tend to be more affluent, suburban and older while Foot Locker customers are younger, more urban and skew towards lower and middle income. And the importance of Nike sales means the acquisition of Foot Locker is not just a bet on the future of sneakers, but also a bet on a major supplier successfully putting the swoosh back into its brand. Both will hinge on whether increasingly hard-up consumers will have extra cash to spend on fancy footwear.
