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