Bernstein sees DKS/FL merger creating top US sports retailer

On Tuesday, Bernstein analysts highlighted the potential market impact of the merger between Dick’s Sporting Goods (NYSE:DKS) and Foot Locker (NYSE:FL), indicating a significant consolidation within the US Sporting Goods Retail sector. According to the analysis, the combined entity would command nearly 10% market share, establishing a dominant number one player in a highly fragmented market. This consolidation comes at a crucial time for the sector, with InvestingPro data showing JD Sports’ stock has taken a significant hit, down nearly 30% over the past year.

The merger is expected to result in a strong market leader, surpassing other competitors such as JD Sports, which will now become a smaller second player. With Dick’s and Foot Locker’s combined 2,500 stores, the new entity will match JD Sports in store count and significantly outpace Academy Sports, which operates approximately 300 stores. Despite the competitive pressure, JD Sports maintains a solid financial position with $14.2 billion in revenue and healthy profit margins of nearly 48%, according to InvestingPro data.

Product offerings, brand relationships, and store formats vary among the top players. Dick’s Sporting Goods focuses on sports equipment and performance sportswear, with larger average store sizes of 70,000 square feet, while JD Sports and Foot Locker, which specialize in apparel and footwear, operate stores ranging from 4,000 to 6,000 square feet. The merger will also allow for a broader reach in customer demographics, as Dick’s typically attracts an older, more Caucasian demographic, while Foot Locker appeals to a more ethnically diverse customer base.

The analysis also points out the considerable geographic overlap between the stores, which presents an opportunity for optimizing the number of stores, although Dick’s management has stated that major store closures are not planned. The overlap is most pronounced between JD Sports and Foot Locker, with 32% of JD’s store estate overlapping with Foot Locker locations.

While Bernstein recognizes the potential for a more rational market environment with less discounting as a result of the merger, there are concerns regarding the impact on JD Sports and the necessity for additional investment into Foot Locker. The merger is seen as a strategic move to create a more diversified and stronger presence in the sporting goods market. According to InvestingPro’s analysis, JD Sports appears undervalued at current levels, with a GOOD financial health score and multiple additional ProTips available for subscribers looking to dive deeper into the company’s prospects.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.