Foot Locker Stock Soars 85% on Buyout Deal. Why Dick’s Has Dropped 14%.
Updated May 15, 2025, 12:02 pm EDT / Original May 14, 2025, 5:37 pm EDT
Foot Locker FL +84.42%
stock skyrocketed Thursday after Dick’s Sporting Goods DKS -15.47%
said it had agreed to buy the shoe retailer for about $2.4 billion. Dick’s investors are less sanguine about the merger, as they question whether undertaking an ambitious turnaround project will hurt, rather than help, an otherwise strong business.
Dick’s said in a press release that it had entered a merger agreement to buy Foot Locker at $24 a share, representing a nearly 90% premium to Foot Locker’s stock price as of Wednesday’s closing bell. Foot Locker shareholders also can choose to receive 0.1168 a share of Dick’s common stock for each share of Foot Locker common stock in lieu of the $24.
The deal would be accretive to earnings per share in the first full fiscal year after closing, and will deliver between $100 million to $125 million in cost synergies in the medium term, Dick’s said. Dick’s plans to finance the acquisition through a combination of cash and new debt. Both companies expect the transaction to close in the second half of 2025.
Yet despite expectations of future earnings stemming from the deal, Dick’s stock was down 14% Thursday morning, on pace for its largest percent decrease since its August 2023 disappointing earnings report, according to Dow Jones Market data. The benchmark S&P 500
SPX
+0.23%
was up 0.3%. Foot Locker shares surged 85%, on track for their largest percent increase on record.It’s clear why Foot Locker shareholders are so ebullient. They’re getting a pretty good payout for a stock that hasn’t performed well for years. Foot Locker shares peaked at $79.20 on Dec. 8, 2016, and have since shed 70% of their value. Earnings seem to have peaked, as well, dropping from $7.77 in the fiscal year ending January 2022 to $1.37 in the year ended this January. Sales growth has been lackluster, outright declining in the last three fiscal years.
But those lackluster results are the same reason that Dick’s investors are nervous about the deal, in spite of the expected synergies. While Foot Locker has struggled, Dick’s has thrived. The shares have gained close to 200% since December 2016, and the company has seen steady improvement in profitability and market share gains.
“The key question that the market will contend with is whether the risk of DKS buying a struggling retailer is more than compensated by the accretion and synergies,” wrote Michael Lasser, an analyst at UBS. “Time will tell.”
TD Cowen analyst John Kernan downgraded Dick’s stock to Hold from Buy on Thursday, arguing that while the deal may be accretive to earnigns per share, the return on capital would be low and the risk to the company’s balance sheet rises. He would rather management focus on Dick’s current growth initiatives, such as the House of Sport or next generation sports, which he says were lower risk with a higher return on investments.
“There is little to no precedence of M&A at scale creating value for shareholders within softlines retail,” he wrote in a note Thursday. “In our view, there are countless examples of M&A destroying billions of dollars in value since we have covered the sector.”
John Zolidis, president and founder of Quo Vadis Capital, agrees, noting that he doesn’t see an “easy solution” to Foot Locker’s problems, which include shrinking market share and an over-reliance on Nike
NKE
+0.32%
sales. The deal, he writes, “invalidates the argument that DKS is deserving of a premium multiple based on consistency of performance and structurally higher margins.” Dick’s has a price to earnings ratio of about 15 times earnings, compared to Foot Locker’s 9.5 P/E ratio.
Indeed, valuation is a concern. Some detractors believe that Dick’s is paying too much for an ailing company.
And certainly a roughly 90% premium seems lofty, acknowledges Lorne Bycoff, co-founder & CEO of the Bycoff Group, a private investment firm that has long been bullish on Dick’s stock. But it doesn’t necessarily feel excessive, he said, a point that other bulls have made.
Foot Locker shares have been especially hard-hit by the potential tariffs on China and other Asian countries, which are the main manufacturers of sneakers and other footwear. The stock traded steadily above $20 for most of 2024, Bycoff pointed out, which may be a better reflection of the underlying value of the business.
In his view, Dick’s could be “taking advantage of a market opportunity” to get a beaten-down company that helps its long-term expansion goals at a reasonable price. One of Dick’s key growth strategies has been growing its footwear business. Footwear accounted for 28% of Dick’s’ total sales in fiscal 2024, up from 26% in 2023 and 24% in 2022.
Acquiring Foot Locker, one of the largest sneaker retailers in the U.S., could help Dick’s consolidate market share in the footwear space and grow its store footprint, giving the company an edge to compete at a bigger scale, Bycoff added. Foot Locker had about 2,400 stores across 26 countries at the end of 2024.
“They’ve got stores and a consumer we’re not going to get based on our real estate strategy,” said Edward Stack, Dick’s’ executive chairman, referring to Dick’s’ preference for larger, suburban-based stores. “We think there’s great financial merit here.”
Those that are favorable on the deal argue that cost synergies could help recover some of Foot Locker’s margins, and the combined company would have more scale to negotiate with vendors and landlords, wrote Needham analyst Tom Nikic. The deal, while surprising, “makes a great deal of financial sense for both parties,” he added.
It also provides a vote of confidence for other beaten-up retail stocks. The Foot Locker acquisition comes at the heels of sneaker-maker Skechers USA agreeing to sell itself to investment firm 3G Capital. The deal, valued between $9 billion and $10 billion, also commanded a hefty premium of about 30% to Skechers 15-day volume-weighed average stock price ahead of the deal’s announcement.
“With both private equity and strategic buyers showing up, it helps put a floor in some of these stocks,” wrote Paul Lejuez, an analyst at Citi.
Dick’s shareholders are just hoping the stock finds a floor soon, too.
Write to Sabrina Escobar at sabrina.escobar@barrons.com and George Glover at george.glover@dowjones.com
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