When Jim Chick, chief executive of Chick’s Sporting Goods, saw the signs that national powerhouse Dick’s Sporting Goods would open stores in Southern California, he heard a stopwatch start ticking.
He took a hard look at his chain’s 14 stores and considered the competitive pressure that a chain such as Dick’s would put on him.
“I already have a big-box Sports Authority in every market I’m in, and a Sport Chalet,” said Chick, who bought out the company that his father founded in 1968 with three stores. “Somebody is going to go away here. Is it going to be the guy with a lot of debt on his back or a multi-million or billion-dollar public company?”
So last week, Chick the one with a lot of debt on his back sold his Covina-based sports store chain to Dick’s, one of the largest such chains in the United States.
The acquisition of Chick’s Southern California stores is a major play in an expansion by the 340-store Pittsburgh, Pa.-based Dick’s, which wants to grow up to 800 stores nationwide. Ninety will be in California, the most it will have in any one state.
That means that regional players, El Segundo-based Big 5 Sporting Goods and La Canada-based Sport Chalet, which have much of their business along the West Coast, could be in for a new challenge.
“Adding one more big box to the mix definitely complicates an already competitive environment,” said Jeff Sonnek, an analyst who covers the industry for Arlington, Va.-based Freidman Billings Ramsey Group Inc. “Dick’s sees that market is saturated and they don’t have a presence out there so they need to find out how to make a difference.”
Before Dick’s announcement, the marquee names among sports retailers in Southern California were Englewood, Colo.-based Sports Authority, Chick’s, and Sport Chalet in the big box segment. Big 5 is also a presence, but it has smaller stores and lower prices.
Chick’s, the smallest of the local chains, was founded 58 years ago in Covina by a local physical education teacher to sell bicycles, hunting and fishing gear and sports equipment.
Jim Chick had considered going public a few years ago when he reached $100 million in sales in order to get capital for expansion. But that plan went away with the passage of Sarbanes-Oxley, which loaded more work and greater expenses on public companies.
“Suddenly you had to be a $500 million company,” he said.
Since then, he has grown Chick’s with the thought of positioning it for sale, or finding a majority partner. Chick’s raised $4 million in private equity for expansion two years ago, and went from $100 million in sales to $140 million, adding four stores for a total of 14.
So, he said, he was interested when Dick’s called him at the end of September while he was fishing in Idaho.
Dick’s agreed to acquire Chick’s for a total of $71 million $40 million in cash and the assumption of $31 million in debt. It’s a fair price for an important acquisition, according to a report put out by analyst Reed Anderson at D.A. Davidson & Co. in Lake Oswego, Ore.
“It is a very strategic deal,” Anderson said in a phone interview. “If you are Dick’s Sporting Goods, approaching $4 billion in sales, purchasing a company bringing in $140 million a year moves the needle but just a penny or two on their earnings. But California is a huge market and this gives them a nice quick foothold in that economy.”
The Chick’s stores will eventually be renamed Dick’s, said Jeffrey Hennion, a senior vice president and chief marketing officer for Dick’s. And two stores that Chick’s had already signed leases for will open as Dick’s stores in 2008 and 2009. The acquisition deal is to close by the end of the year.
Consolidation days
The sporting goods industry on the retail side had historically been regionally based. Consolidation began in the late 1980s and has increased at a rapid rate, leaving two clear leaders on the national scene: Dick’s and Sports Authority.
In 2003, Sports Authority, already the largest sporting goods chain in the country, acquired Gart Sports Co. Gart had previously swallowed up Sportsmart and Oshman’s.
Dick’s purchased the Galyan’s Trading chain in 2004. And in February Dick’s bought the 75-store Golf Galaxy.
“Sporting goods would be considered a fragmented marketplace and you’ve seen the only consolidation is from the larger format retailers like Dick’s Sporting Goods as well as Sports Authority, which started the consolidation play,” said Sonnek of Friedman Billings. He added that many smaller players have been forced out of the marketplace because they can’t keep their pricing competitive or because of the real estate market.
Dick’s, which has stores in 36 states, mostly east of the Mississippi, has been slowly moving west with its eyes on California for years.
“The Chick’s acquisition is a similar strategy as what they employed through the Galyans acquisition in 2004,” Sonnek said. “That opened them up to a lot more markets. They used that acquisition as an incubator. It gave them instant penetration and then they could backfill the market.”
He suspects a similar strategy will be employed in California.
Increased Competition
The fact that Dick’s has agreed to purchase an existing chain instead of building from the ground up could be positive for regional companies Sport Chalet and Big 5, analysts said.
For the moment, the number of brand names competing for market share doesn’t change.
But Dick’s proliferation in California will mean more competition as it builds, analysts said.
“It is such a competitive industry, and if you look at the people that operate in California Big 5 and Sport Chalet they have had a tough couple of quarters, mostly because of the economic conditions in the area, especially in the Central Valley,” Anderson said.
Sport Chalet, which has 41 stores in California, has already been feeling the sting of competitors. In the most recent quarter, Sport Chalet saw a decrease in same store sales of 2.2 percent, caused in part by economic conditions that have been affecting the entire retail sector and in part by competitors opening new stores.
The company’s net income was $739,000 for the quarter, compared with $1.7 million for the same quarter last year.
Sport Chalet executives didn’t return calls for this article.
Big 5 saw a 0.2 percent drop in same store sales for the second quarter. It was the first quarterly same-store sales drop in nine years. The chain showed a 0.1 percent increase in the third quarter.
But Big 5 is putting on its game face.
“Big 5 has grown successful in California and the West Coast for more than 50 years,” said Chief Executive Steven Miller. “We have seen significant changes in the competitive landscape, including mergers and acquisitions. Through it all we have had a very successful track record.”
Dick’s also has plans to thrive on the West Coast as much as it has in the East.
“We already set ourselves apart throughout the rest of the U.S.,” Hennion said. “We plan to continue to do so in Southern California by offering exclusive product, higher end merchandise, services, and an unmatched store environment, all at the best prices.”
