Dick’s Sporting Goods: Foot Locker Acquisition Brings Opportunities and Concerns

Key Morningstar Metrics for Dick’s Sporting Goods

• Fair Value Estimate: $155.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

Dick’s Sporting Goods DSK will buy rival athletic apparel and footwear retailer Foot Locker FL for $2.4 billion in equity value, paid in cash or stock. Separately, Dick’s revealed solid preliminary first-quarter results of 4.5% comparable sales growth and $3.37 in adjusted earnings per share.

Why it matters: If approved, this acquisition will be transformative, adding about 2,400 stores and $8 billion in yearly sales to Dick’s base of more than 850 stores and $13 billion in sales. Based on Foot Locker’s 2024 results, Dick’s is paying an attractive (in our view) 6 times 2024 adjusted EBITDA or 0.3 times sales.

• As Foot Locker operates more than 800 stores in Canada, Asia-Pacific, Europe, and the Middle East, Dick’s will go international for the first time. Although this adds complexity, global expansion increases the company’s addressable market and may improve relationships with its vendors.
• Dick’s first-quarter results surpassed our estimates for 1.3% comparable sales growth and $3.19 in EPS. We think this performance in a tough environment for sportswear affirms the strength of the company’s management and strategy.

The bottom line: We expect to raise our $155 fair value estimate by a low-single-digit percentage, given the preliminary results. Dick’s shares fell 15% on May 15 but remain slightly overvalued. Investors appear to regard Foot Locker (not covered by Morningstar) as a declining retailer.

• Indeed, Foot Locker revealed weak first-quarter preliminary results, including a 2.6% comparable sales decline. It has been closing stores for years as its largely mall-based North American stores have lost shoppers to other channels, including Dick’s.
• Dick’s and Foot Locker will be run separately, so our narrow moat rating based on Dick’s brand intangible asset is unchanged. We also maintain our Standard Capital Allocation Rating as we see value in the deal.

Big picture: We think Dick’s can apply its deep knowledge of footwear to improve Foot Locker’s results.