Fashion, footwear and retail mergers are not for the faint of heart.
Dick’s Sporting Goods earlier this month completed its $2.5 billion acquisition of . It’s a deal that has some pluses on paper. The combined entity gives it a store network of over 3,200 doors, plus e-commerce and digital business across 20 countries in North America, Europe, Asia, and Australia. That gives Dick’s the ability to reach new customers stateside and internationally. There’s also a licensed store presence in Europe, the Middle East and Asia. And on the vendor side, another benefit will be stronger relationships with key brand partners through multiple platforms. Jefferies analyst Randal J. Konik said in May when the deal was first announced that the transaction was a “positive development for Nike.” Nike has been struggling of late, and Konik said Dick’s operational improvements to Foot Locker “could enhance Nike’s retail presence and brand consistency.”
But Foot Locker’s losses had widened just before completion of the merger. For the second quarter ended Aug. 2, the sneaker retailer posted a net loss of $38 million versus a net loss of $12 million for the same year-ago quarter. Total sales were down 2.4 percent to $1.85 billion. Former Foot Locker CEO Mary Dillon — she exited the company upon the completion of the merger — said last month that the results were the result of a “challenging operating environment and soft store traffic trends.”
Sam Poser at Williams Trading views the newly combined entity as a challenge for Dick’s, noting in a research report that Foot Locker’s most recent earnings was “far worse than expected.”
Poser recognized the “impressive evolution” that has occurred at Dick’s over the past five years, noting improvements in store layout and design, omnichannel execution, exclusive brand execution, and brand and product assortments.
“Overall, we believe that Dick’s Sporting Goods has become the default sporting goods store, but generally not the ‘must go to’ sporting goods store,” he concluded. His major criticism was whether the Dick’s team had the know-how to manage and turnaround the Foot Locker business, noting that while both retailers sell athletic footwear and apparel, “the store model, geographies served, and the types of consumers they serve vary too much to foresee a clear path to success for the combined entity.”
Poser also pointed out a factoid about Foot Locker and how it is more an athletic specialty retailer focusing on fashion lifestyle consumers, with smaller boxes than Dick’s located mostly in malls or in urban street locations. That’s different from Dick’s big-box play. In fact, Dick’s newest House of Sport retail concept, which opened last week inside the Newport Centre shopping mall in Jersey City, N.J., totals 85,000-square-feet. Despite its size, the retail concept’s second urban store is the retailer’s smallest door, which are typically over 100,000-square-feet.
The merger saw Dick’s executive chairman Ed Stack taking charge of Foot Locker’s business, as well as the naming of a new leadership team for North America, with international still to be determined. Former Nike veteran Ann Freeman was named president of Foot Locker North America. And it appeared that in addition to Dillon, Foot Locker president Frank Braken and merchandising head Bryon Millburn are not part of the going-forward leadership team.
“We continue to believe that Foot Locker will benefit from Dick’s operational strengths,” Poser said. “At the same time, we remain concerned that the running a small box athletic specialty retailer, that serves a different consumer base than Dick’s Sporting Goods does, in some totally different markets, spread Dick’s too thin. It’s way too early to say Vive la Difference.”
Jefferies analyst Jonathan Matuszewski has a “Hold” on shares of Dick’s, noting that “concerns remain around Foot Locker’s continue underperformance and the risk that assortment changes may not be enough, potentially diverting focus from Dick’s core business.”
TD Cowen’s John Kernan also has a “Hold” on shares of Dick’s, citing uncertainty on Foot Locker’s turnaround. While cost and procurement synergies could total between $100 million to $125 million, he expects that headcount reductions and store rationalization are a possibility.
There’s also speculation that Champs Sports might be one of the Foot Locker banners that could go away. Banners operated by Foot Locker include the core Foot Locker business, Kids Foot Locker, Champs, WSS and Atmos.
While it is too soon to tell how Dick’s and Foot Locker will evolve post-merger, history hasn’t been too kind to fashion mergers.
The Stuart Weitzman brand was acquired by Tapestry in 2015 from Sycamore Partners in a deal valued at $574 million. Jay Schmidt, president and CEO of Caleres Inc. had his eye on the brand, but was outbid by Tapestry. And while Tapestry had hoped to gather learnings on footwear production, word in the shoe market from investment bankers was that its biggest mistake was in throwing out the lasts that the brand’s founder and chief designer had perfected over the years. Changes in creative direction added to the problems. Stuart Weitzman was put up for sale again, and this time Schmidt and Caleres was able to close on a $108.7 million deal for the brand.
Tapestry’s chief handbag competitor Capri Holdings Ltd. didn’t have much luck either. The Michael Kors parent acquired British luxury shoe and accessories brand Jimmy Choo in November 2017 for $1.35 billion. Capri later acquired Gianni Versace S.r.L. in January 2019 for $2.12 billion, with Donatella Versace staying on as head of creative design. December 2024 saw both brands put on the auction block. Versace was sold to Prada in April for 1.25 billion euros, with Donatella becoming chief brand ambassador when her contract expired one month before the deal was announced. But there were market rumblings before that about her and Capri CEO John Idol not getting along, mostly over the direction of the Versace brand’s iconic Medusa logo.
The Jimmy Choo brand had its issues too, mostly because Capri acquired the brand at the time when it was already at its peak, with not much runway for expansion. The COVID-19 pandemic hurt the brand, when social distancing left few options for the occasion business. And even when business rebounded, athleisure and sneakers were the go-to choices, not sky-high stilettos. Jimmy Choo cofounder Tamara Mellon is said to be interested in buying the brand, but that appeared to have fizzled out. Bankers say financing can be hard to get when a brand’s business model fails to have a clear line for growth. And compounding that is the current retail backdrop, with luxury battling both inflationary concerns and fears of growing caution over consumer spending. For now, Jimmy Choo remains under the Capri umbrella, as the company also undertakes to reinvigorate its core Michael Kors brand.
In retail, perhaps the biggest merger mistake was the 2005 combination of two struggling retailers trying to fend off competition from Walmart and Amazon, the mass discounter Kmart and the department store retailer Sears, Roebuck, to form Sears Holdings Corp.
While both retailers had an assortment mix in softlines that overlapped — soft home goods, apparel and shoes — it wasn’t enough compensate for other issues lurking in the background. Poor management was one problem, and a lack of adaptation to changing consumer habits was another. Critics of the deal have long said the merger was essentially a real-estate deal, which in the end benefited ESL Investments chairman Eddie Lampert, who engineered the deal. With real estate locations either sold or spun-off over time, not much was left of Sears Holdings when it filed for Chapter 11 bankruptcy court protection in 2018. Currently, less than a handful of Sears and Kmart banners exist within the U.S., with another few more located in Puerto Rico and the U.S. Virgin Islands. The business is under the ownership of Transformco, which is controlled by Lampert.
