Dick's Sporting Goods to acquire Foot Locker for $2.4 billion in effort to corner Nike market

Dick’s Sporting Goods said Thursday 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. Foot Locker shareholders can receive either $24 in cash – a roughly 66% premium of Foot Locker’s average share price over the last 60-days – or 0.1168 shares of Dick’s stock.

Foot Locker CEO Mary Dillon has been undertaking an ambitious turnaround at the footwear retailer, and while there have been signs of improvement, larger market conditions like tariffs and consumer softness have weighed on the company’s stock, making the company a potential takeover target. As of Wednesday’s close, Foot Locker shares were down 41% this year. 

In a joint press release, Dillon said the acquisition is a “testament” to all of the work her and her team have done to improve the business.

“By joining forces with DICK’S, Foot Locker will be even better positioned to expand sneaker culture, elevate the omnichannel experience for our customers and brand partners, and enhance our position in the industry,” said Dillon.

The CEO added she was “confident this transaction represents the best path for our shareholders and other stakeholders.”

While the companies are longtime rivals — both competing to sell the same brands in their stores — Dick’s is almost double the size of Foot Locker in terms of revenue. In their most recent fiscal years, Dick’s reported $13.44 billion in revenue, while Foot Locker saw $7.99 billion.

Dick’s said it expects to operate Foot Locker as a standalone business unit within its portfolio and maintain the company’s brands – Foot Locker Kids, WSS, Champs and atmos. 

Dick’s CEO Lauren Hobart said on a conference call Thursday that the two businesses will be run as separate entities and the consumer “may or may not know that Dick’s and Foot Locker are one.”

“The combination of them for the consumer is not the most important thing, it’s making sure that there’s two powerful brands that are meeting all consumer needs, wherever, whenever, however they want to shop,” Hobart said.

The merger brings together two iconic names in sports retailing and will give Dick’s a massive competitive edge in the wholesale sneaker market, most importantly for Nike products.

Currently, Nike’s primary wholesale partners are Dick’s, Foot Locker and JD Sports. If the merger is approved, the combined company would be able to corner the Nike market at a time when the sneaker giant is more reliant on wholesalers than in years past. 

The acquisition will also allow Dick’s to enter the international markets for the first time, as Foot Locker operates 2,400 retail stores in 20 countries, and give it access to the type of consumer who doesn’t usually shop at its stores. The Dick’s customer tends to be affluent, suburban and older, while the Foot Locker customer is urban, younger and more likely to be lower- and-middle income. That latter customer has long underpinned sneaker culture and is critical for Dick’s to reach long-term growth and competitive advantage. 

While Hobart said the company is not looking toward international expansion at this time, the total addressable market that Dick’s is operating in will grow from $140 billion to $300 billion due to Foot Locker’s global reach.

The proposed combination raises considerable anti-competition concerns, but Wall Street expects President Donald Trump’s Federal Trade Commission to be more favorable to mergers.

Hobart said during the call that the companies are “not expecting any regulatory concerns” with the FTC.

Foot Locker shares soared more than 80% after the deal was announced Thursday. Shares of Dick’s fell roughly 15% as investors worried about the impact the merger could have on financial results.

While Dick’s expects the transaction to be accretive to earnings in the first full fiscal year post-close, and to deliver between $100 million to $125 million in cost synergies, Foot Locker has been struggling for some time. It has a cumbersome store footprint, many of which are in malls, and it’s more exposed to economic downturns because of the lower income level of its customer.  

Foot Locker has assessed all of its stores and determined that some locations could close, Hobart said, but she does not expect a “significant” number of stores to shutter.

In a note on Thursday, TD Cowen called the deal a “strategic mistake” as it downgraded shares of Dick’s to hold from buy. Analyst John Kernan said the deal is “likely to produce low returns” and presents clear risks to synergies, integration and the structural foundation of Foot Locker’s business. Kernan expects the return on capital to be low and said it raises balance sheet risks.

“There is little to no precedence of M&A at scale creating value for shareholders within Softlines Retail. In our view, there are countless examples of M&A destroying billions of dollars in value since we have covered the sector,” said Kernan.

Dick’s Executive Chairman Ed Stack said the company knew there would be some initial skepticism in response to the merger, but stressed that the two companies are “highly confident” and “up for the job.”

“We’re pretty conservative. We don’t have a lot of big egos here,” he said. “If we didn’t see this clear line of sight to this, or we thought that this was going to impact what we’re able to do with Dick’s, we wouldn’t be doing it.”

Both companies pre-announced fiscal first-quarter results after announcing the merger. Foot Locker reported comparable sales down 2.6% from the prior-year period, led by a slowdown internationally, and expects to see a net loss of $363 million for the period, compared with a net income of $8 million in the year-ago period. That loss includes $276 million in charges related primarily to trademark and goodwill impairments.  

Meanwhile, Dick’s said it saw comparable sales growth of 4.5% and earnings per share of $3.24.

“We are very pleased with our strong start to the year and our demonstrated sustained growth,” said Hobart. “The strength of our business puts us in a great position for our proposed acquisition of Foot Locker — a transformative step to accelerate our global reach and drive significant value for our athletes, teammates, partners and shareholders.”