Last week, Dick’s Sporting Goods (NYSE:DKS) announced that it would acquire footwear retailer Foot Locker (NYSE:FL) to further build out its portfolio of sports gear businesses.
In the meantime, Foot Locker will remain a standalone business but the future for it and Dick’s is now a tectonic shift from prior trajectories.
Is Dick’s Sporting Goods buying Foot Locker a smart move, and how might the acquisition play out for those who own DKS shares?
What Kind of Premium Is Dick’s Paying?
Dick’s is planning to pay $24 per share for FL, though shareholders can also choose to accept 0.1168 shares in the combined company.
Based on the company’s trailing 12-month EPS of $0.13, this would have Dick’s paying an astronomical multiple of nearly 185x earnings for the company.
Tellingly, this also represented a nearly 90 percent premium to what shares of Foot Locker were going for at the last close before news of the deal broke.
What Do Shareholder Think About the Deal?
Given the huge premium that Dick’s is preparing to pay for Foot Locker, it will likely come as no surprise that its stock moved lower by about 15% after the acquisition was announced.
This signals that shareholders found the price Dick’s was offering to pay for Foot Locker too high, an opinion that may have been magnified by the currently weak outlook for the broader economy.
For obvious reasons, investors on the other side of the proposed transaction have had a dramatically more positive reaction to the possibility of Foot Locker being acquired. Going on the price of $24 per share, buyers have quickly bid the stock up to over $23. As a result, the stock has very nearly doubled over the last five trading days and is up nearly 115% in the last month.
Can Dick’s Turn Foot Locker Around?
To a large degree, the decision to buy Foot Locker appears to have been driven by the fact that the company was already a somewhat distressed asset.
Foot Locker has struggled in recent years as the decline in traffic at brick-and-mortar shopping malls has caused it to shutter many of its stores. Attempts to engage younger consumers, meanwhile, have been met with tepid responses. Thanks to these long-term headwinds, the market cap had declined from over $10 billion in the mid-2010s to only a little over $1 billion before Dick’s plan to acquire it became public.
Dick’s, however, may be in a good place to turn Foot Locker around after years of secular decline. The team’s operational know-how has allowed it to build its business steadily over many years, and it’s likely that it will be able to use that same expertise to give Foot Locker a much-needed boost.
Over the past 10 years, Dick’s has successfully built its annualized revenues from a bit over $7 billion to more than $13 billion.
Dick’s Sporting Goods could finally help Foot Locker reach younger consumers by providing it with the digital marketing experience needed to generate omnichannel sales.
One of the factors that has led to the success of Dick’s is the focus it placed on eCommerce in the late 2010s and early 2020s. The same strategies that helped Dick’s maintain its sporting goods dominance in the digital age could also help to modernize Foot Locker once the companies combine.
A large part of the equation also seems to be accessing Foot Locker’s substantial real estate portfolio and its international business presence. To date, Dick’s Sporting Goods has operated entirely within the United States. The Foot Locker acquisition will allow the company to dip its toes into the waters of international business for the first time, potentially creating large long-term opportunities in foreign markets.
On the whole, it seems likely that Dick’s can both add value to the Foot Locker business and leverage the firm’s assets to improve its own business. As a result, the purchase has at least the potential to unlock substantial long-term value for DKS shareholders.
Is the Foot Locker Buy a Smart Move for Dick’s?
In many ways, Dick’s and Foot Locker have the potential to complement each other. If Dick’s can bring its digital expertise to Foot Locker’s strong but generally more traditional brand, the combined company could see ongoing growth as a result.
Dick’s considers Foot Locker a strong enough brand to keep it operating as a standalone business, something that likely points to a belief on management’s part that the footwear retailer is still entirely viable with a bit of additional help.
The possible problem, however, seems to be the massive premium that Dick’s is paying to secure ownership of Foot Locker. Though acquisitions almost always include a shareholder premium, the average premium across all industries tends to be around 34%. The premium that Dick’s is paying for Foot Locker, however, is well out of the average range for all but high-tech business acquisitions.
The current climate may very well also push back the timeline on which Dick’s will see returns from the acquisition. With higher input costs from tariffs and consumers cutting back due to worries about the rising cost of living, Foot Locker may be in for a somewhat difficult period. This certainly doesn’t nullify the long-term value argument for the acquisition, but it may call into question the wisdom of paying so much for the business at the moment.
On the whole, Dick’s Sporting Goods may be paying a bit too much for Foot Locker, but there’s also a good chance that it will be able to leverage its eCommerce expertise and greater resources to make Foot Locker far more valuable than it currently is.
The international exposure may also be very beneficial for Dick’s in the long run as a bridge to further the footprint its core business. So, while the price may be somewhat high, it seems more likely than not that buying Foot Locker will be a good decision for Dick’s, even if the investment takes a while to pay off.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.