In a move heavily influenced by real estate strategy, retailer Dick's Sporting Goods is paying $307 million for competitor Galyan's.

The Galyan's portfolio is in high-quality but scattered locations, observers say. “If any management in the industry can transform the Galyan's sites and make the most of them and the most of the combination, Dick's management can,” says Think Equity Partners analyst Ed Weller. Galyan's, partly owned by Limited Brands, has been reasonably profitable in the past, but the retailer's earnings last year on $690 million of sales were only half what Wall Street expected. In 2003, the retailer's same-store sales declined by 6 percent.

The transaction will enable Dick's to enter new markets such as Atlanta, Chicago, Minneapolis and Denver. Galyan's and Dick's overlap in several markets, including Indiana, Ohio, upstate New York and Virginia. But few of their stores compete directly because none are on the same street or in the same general vicinity. All Galyan's 51 stores will convert to the Dick's banner by mid-2005.

Assuming management of Galyan's stores could be something of a challenge for Dick's, which currently operates only five two-level stores, with four of those opening in the past year. Dick's two-level centers average 75,000 square feet while the rest of the stores average about 49,000 square feet. By contrast, the majority of Galyan's outlets average 88,000 square feet and feature two levels. “Dick's management must be comfortable that it can operate such stores profitably and earn attractive returns on investment in them to go forward with such an offer,” Weller says.

The Galyan's Deal At A Glance
DICK'S GALYAN'S PRO FORMA
Stores 163 43 206
Average Store Size 4,800 sq. ft. 8,800 sq. ft. 5,600 sq. ft
Revenue $1.47 billion $690 million $2.16 billion
Revenue per store $9 million $16 million $10.4 million
Market Share 2% 1% 3%
Source: Company reports & Thomas Wiesel Partners


The deal, expected to close by the end of the year, features an aggressive valuation, according to Fulcrum Global Partners analyst George Lusch. Dick's is paying a 10.6x TTM EBITDA multiple for Galyan's, compared with the 7.0x multiple that Gart Sports paid for The Sports Authority in a similar transaction. Dick's management expects 30 percent growth in earnings per share for 2005 based on the deal. “Dick's is very disciplined and would not make such a bold move without a high confidence in its ability to integrate these new assets, capitalize on a variety of real synergies and earn attractive returns on the acquired stores,” Weller says.