Dick's answers Gart with Galyan's

DSN Retailing Today, July 5, 2004 by Mike Troy

PITTSBURGH, PA. -- Dick's Sporting Goods' relatively short but stellar track record as a public company will be put to the test this fall when it attempts to execute its largest operational challenge to date by integrating the recently announced acquisition of Galyans Trading Company.

The two companies last month announced that Dick's would spend $362 million to assume $57 million in Galyan's debt and pay its stockholders $16.75 a share. The deal creates a $2.2 billion sporting goods chain with 216 stores in 32 states by combining Dick's 169 stores and annual sales of $1.5 billion with Galyan's 47 stores and annual sales of $690 million.

While the $16.75 per share acquisition price raised some eyebrows because it represented a 53% premium on the price that Galyan's stock closed at the previous day, Dick's chairman and ceo Ed Stack said during a conference call announcing the deal that the price was fair and appropriate. The transaction, which is expected to close in October, according to Stack, is also expected to increase earnings per share for the year to $1.28 to $1.30 from the company's previous guidance of $1.27 to $1.28. Looking ahead to 2005, Stack said he expects earnings per share to rise 30% to $1.70 to $1.75. The company plans to use cash and borrowings under an expanded credit facility to pay for Galyan's.

"In total, the combination of our merchandising philosophy, emphasis on execution and financial discipline that has produced industry-leading performance, combined with the people, premium real estate and logistics infrastructure of Galyan's, creates a compelling rationale for this transaction," Stack said.

The logistics component referred to by Stack is Galyan's 364,000-square-foot distribution center near its headquarters in Plainfield, Ind. Dick's is keeping the distribution center, but plans to close the headquarters. The premium real estate referred to by Stack is Galyan's base of large-format stores, most of which range in size from 80,000 square feet to 100,000 square feet, occupy two levels and are located in major metropolitan markets. Those are quite different from Dick's stores, which average about half that size, although two years ago the company opened a larger-format store that was two levels and measured 75,000 square feet. The other aspect of Galyan's store base appealing to Dick's is the fact that Galyan's has a modest presence in several large urban markets where Dick's currently is not located, such as Dallas, Atlanta, Chicago and Denver. Galyan's has but two or three stores in those markets, providing Dick's with years' worth of backfill opportunity.

Before Dick's can realize any of the theoretical benefits associated with the acquisition, it will have to do something it has never done before: actually integrate an acquisition. And not just any acquisition, Galyan's stores are dramatically different from Dick's, both in terms of their size and merchandise mix. In addition, Stack contends the integration process, which includes the remerchandising and rebranding of Galyan's stores, will take place on an aggressive time frame and be completed by mid-2005.

When pressed on the timing of the integration by an analyst during the conference call, Stack reaffirmed that the company is "very comfortable with our guidance that we will get these stores converted by the middle of 2005."

Even though Dick's has not done any acquisitions, the company has added a considerable number of executives from outside the sporting goods world who have experience integrating acquisitions and are capable of handling the task, according to Stack.

"We understand that there are inherent risks and we need to make sure that we execute, so we are not downplaying that at all. We also knew it was something the management team could handle," Stack said. "As we looked at this we found that it was absolutely the right thing to do for this business long-term."

Although no changes to the stores will take place until the deal closes later this year, the most obvious shifts will take place in the areas of hardlines and apparel. Dick's plans to adjust Galyan's merchandise assortment to be more reflective of Dick's positioning as an "authentic" sporting goods retailer; whereas Galyan's considers itself as an active lifestyle retailer that appeals to casual consumers and serious sports enthusiasts alike. That essentially means Galyan's stores will stock more hardline products, while the assortment of markdown-prone fashion apparel will be reduced. It is interesting to note that last year Dick's generated 59% of its sales from hardlines compared to 48% at Galyan's, while apparel accounted for 38% of Galyan's sales compared to 23% at Dick's. Despite the prevalence of higher-margin goods in Galyan's product mix, Dick's still managed to generate a higher gross margin than Galyan's.

Although the two company's have some differences, there are also some similarities. In fact, the companies had begun moving in the direction of one another. Dick's opened its first 75,000-square-foot, two-level store in 2002, added another in 2003 and then two more earlier this year. Likewise, Galyan's had experimented with smaller, single level stores that measured 65,000 square feet, with a unit that opened in Peoria, Ill., in March 2003 and a similar unit that opened earlier this year near Madison, Wisc.