It looks like Foot Locker will have a new owner and its well-known athletic apparel retailer Dick’s Sporting Goods.
This week Dick’s Sporting Goods announced definitive agreement to purchase Foot Locker for $24 a share, or $2.4 billion. Compared to Foot Locker’s closing price on Wednesday of $12.87, this offer is a sizable premium.
“With macro trends like the growing convergence of sport and culture … we believe the long-term industry tailwinds remain strong and that this expanded platform is well positioned for long-term growth,” CEO Lauren Hobart said to investors on a call.
Dick’s believes it will strengthen the relationship with brand partners through global reach. The $24-a-share deal allows Dick’s access to roughly 2,400 Foot Locker stores across 20 countries. The company is also expected to make hefty investments to fix Foot Locker’s business outlook. Foot Locker reported $8 billion in revenue in 2024, slightly down from 2023, with an adjusted EBITDA of $395 million.
Dick’s executive chairman Ed Stack said on an investor call that the company wouldn’t have done this deal if it thought it would impact the business trajectory for Dick’s long term.
“We knew there would be some skepticism,” Stack said, “but we’re up for the job.”
What are people saying about the deal? It’s a good move for Foot Locker shareholders, as Foot Locker has been struggling and Dicks has been performing well. The deal could also help Foot Locker expand its online presence, compete better in the digital era, and potentially expand internationally.
Additionally, Dicks’ customer base is different from Foot Locker’s, so the deal could also help Dicks broaden its reach. However, some also acknowledge that the merger raises anti-competition concerns.
“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,” Telsey Advisory Group’s Joe Feldman said to clients in a note.
The agreement could strengthen Dick’s partnership with big sport apparel brands like Nike as well as give the company an international presence.
Some remain cautious over the deal as Foot Locker’s same store sales in the preliminary Q1 results had declined 2.6%. This is compared to Dick’s own growth of 4.5%. Dick’s also reported record total sales of $13.4 billion last fiscal year. Foot Locker, which has struggled as mall foot traffic nationwide decreases and has lost about 40% over the last year.
Naysayers aren’t convinced that Dick’s can revive Foot Locker, which plans to close 400 stores by next year. Plus, Dick’s has had some shaky recent acquisitions including its purchase of outdoor retailer Moosejaw from Walmart in 2023.
Sam Poser of Williams Trading told Yahoo Finance if Dick’s management takes “30% of their time to focus on getting Foot Locker up to snuff. That’s 30% of the time that they’re not spending on the mothership … which then theoretically would hurt Dick’s business.”
“The industry is dealing with ongoing shifts toward direct-to-consumer distribution,” Felman added, “and Foot Locker has been experiencing soft demand since 2018, except for the Covid year in 2021 … Dick’s is already positioned to perform strongly with its current form and strategic initiatives.”
“People are looking at it and saying, Why devote all this time and investment to save Foot Locker when they have stuff they can invest in at Dick’s that’s working?” said David Swartz, an analyst with Morningstar Research, said in a phone interview. Swartz has covered the company for six years. “That’s the concern.”
“There also some concern that if Dick’s was to turn Foot Locker around, then it would be more competitive against Dick’s,” he added.
For the last reported quarter, Dick’s came out with earnings of $3.62 per share versus the Zacks Consensus Estimate of $3.49 per share, representing a surprise of 3.72%. For the previous quarter, the company was expected to post earnings of $2.68 per share and it produced earnings of $2.75 per share, delivering a surprise of 2.61%.
Foot Locker’s sales declined during the 2024 holiday season happened during a time when mall visits were down nationwide in December. According to data from Placer.ai, indoor mall visits in December fell 0.6% year-over-year, while visits to outdoor malls declined by 1.8%. At the time, Chief Commercial Officer Frank Bracken warned investors that Foot Locker’s apparel sales were struggling due to a lack of innovation in silhouettes, colors, and materials.
“As innovation within apparel is lagging compared to our footwear business, we see this manifest in a more promotional environment as consumers clearly are seeking more newness and innovation in the category,” said Bracken during an earnings call on Dec. 4.
Foot Locker also flagged that in February, it continued to see customers pull back on their spending, which is hurting sales.
“We saw consumers be more cautious and sensitive, which has impacted our business quarter-to-date,” said Robert Higginbotham, Foot Locker interim chief financial officer, during the call. “We’re seeing consumers respond and come out to spend during compelling activations, key shopping events, and product launches or newness. They spend when there’s a call to action, but they are more cautious in those in-between periods.”
Foot Locker shares exploded over 80% on Thursday while Dick’s saw its shares sink 15% as investors weighed the financial risks of the agreement. Dick’s extended its losses into Friday trading.
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