2004: Business - Dick’s set to expand into key golf markets

Dick’s Sporting Goods, a major national retailer, is on the verge of growing its storefronts by nearly 30 percent and introducing its popular in-store golf pro shop to key markets such as Chicago, Atlanta, Minneapolis, Dallas and Denver.

An agreement was announced June 21 for Dick’s to acquire rival sporting goods retailer Galyans Trading Co. The cash transaction calls for the Pittsburgh-based superstore operator to assume Galyans’ $57 million of debt and pay investors $16.75 per share for 18.2 million outstanding shares of stock.

All Galyans stores would be renamed Dick’s. The deal is estimated to be approximately $362 million, with a tender offer to be made June 28. It is expected to close by October.

“Our plan is to convert the Galyans stores into Dick’s stores and bring the merchandise assortment in line with that of Dick’s,” said Ed Stack, the company’s chief executive.

Many industry observers anticipated Dick’s move as a competitive response to last year’s merger between The Sports Authority and Gart Sports. If completed, the acquisition would bolster Dick’s presence in many of its existing markets. Dick’s also would gain access to other golf-rich arenas that otherwise would have taken “years for us to enter,” Stack said.

With the addition of Galyans’ 47 locations, Dick’s would operate 216 stores in 32 states. By the end of the fiscal year, Dick’s expects its total number of stores would grow to 239 in 33 states. It anticipates full conversion during the first half of 2005.

Specific plans have not been released regarding golf operations, but Dennis Magulick, manager of investor relations at Dick’s, said golf was “an extremely important part” of Dick’s overall business plan.

Historically, golf has accounted for about 15 percent of Dick’s total sales, which were $1.47 billion in fiscal 2003. With its in-store pro shops, the company has become one of the golf industry’s most formidable retail operations. The Dick’s Pro Shop model and the retailer’s highly profitable Walter Hagen private label likely will be integrated into the acquired Galyans stores.

But some analysts caution that Dick’s may be paying too high a price for the acquisition. When the proposed deal was announced, Dick’s per share offer was 50.9 percent greater than Galyans’ closing price of $11.10. Analysts also took note of Galyans’ weak financials: Its net income fell to $3.6 million in 2003 from $18.7 million in 2002.

Other analysts question whether Galyans’ typical two-story stores of 80,000 to 100,000 square feet – significantly larger than a conventional Dick’s store – will be a good fit. However, Dick’s already has opened five two-story, 75,000-square-foot locations in recent months, and Stack says the larger stores produce similar returns.

It remains to be seen if the merger will bolster Dick’s purchasing leverage with golf manufacturers, and what ramifications that would have on competitors.

“The manufacturers have given them special products and deals that they have not offered the rest of the golf industry,” said Julian Bunn, president of Carolina Custom Golf, which operates six shops in North Carolina, a market Dick’s recently entered. “I’ve talked to people all over the U.S. and in Canada, and all of them are feeling this favoritism of some of the major manufacturers.”

Added Jim Dion, a Chicago-based retail consultant and president of Dionco Inc.: “Clearly when your volume increases by that magnitude, if you’re not getting outright cost breaks, you’re getting other breaks.”

But Matt Powell, a New Jersey-based retail analyst and contributing editor of Sports Executive Weekly, said he did not expect substantial changes in Dick’s relationship with vendors.

The TSA-Gart merger produced “some leverage with the vendors, but not as much as everybody thought there was going to be,” he said. “A lot of vendors say to me, ‘If my business is going to grow, then I’m interested in talking about more incentives. If my business is going to combine, I’m not really ahead, so why am I giving you any more incentive?’ ”

Some major manufacturers said they didn’t anticipate undue pressure from the fast-growing retailer.

“We don’t see anything happening with regards to leveraging and making us do something we wouldn’t typically do,” said Chris Holiday, senior vice president of sales at TaylorMade-Adidas Golf.

Dick’s plans to close Galyans’ corporate head- quarters in Plainfield, Ind., and a minimum number of stores (either Dick’s or Galyans) based on overlap and performance. No commitment has been made to retain Galyans management team, although “we anticipate talking to many people at Galyans and hope that a number of them will join us in Pittsburgh,” Stack said.

Dick’s intends to maintain Galyans’ distribution center in Plainfield along with its own Smithton, Pa., distribution facility, which is being expanded by 200,000 square feet.

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