UBS said Dick’s Sporting Goods’ acquisition of Foot Locker could unlock far more value than investors have priced in, arguing that the market reaction has been overly negative.
Dick’s shares fell 14% on the day the deal was announced amid concerns that the company was taking on a struggling mall-based retailer whose margins and traffic have been eroded by Nike’s pivot to direct sales and declining footfall.
TD Cowen called the purchase a “strategic mistake,” warning Dick’s would have to spend heavily to fix Foot Locker before seeing returns.
Contrary to mkt reactions and Street views UBS says the combined businesses offer a 60% upside versus 20% downside over time.
“We think the power of the combined business should drive far greater upside than downside,” the analysts said.
Analysts at UBS said Dick’s operational discipline could lift Foot Locker’s margins, improve its product mix and help regain market share.
UBS estimated that every 10 basis-point share gain across the merged company could add about 80 cents to earnings per share, assuming a 35% contribution margin.
A 50 bps improvement in Foot Locker’s operating margin alone would add about 95 cents to Dick’s 2027 earnings estimate, or roughly 6% upside.
It also sees scope to quietly trim overlapping stores even though Dick’s has said closures are not planned. Shutting 100 Foot Locker locations and recapturing 20% of abandoned sales could add another 11 cents per share, UBS said.
The deal could also reduce promotional pressure between the two chains and strengthen Dick’s negotiating leverage with brands like Nike.
A 50 bps improvement in selling margin on Nike goods would add about 35 cents a share, while advertising savings could contribute another 45 cents.
UBS expects Dick’s to resume buybacks sooner than exp
Source :
https://www.investing.com/news/stock-market-news/dicks-acquisition-of-foot-locker-offers-more-upside-than-market-assumes-says-ubs-4269303
