Ed's way stacks up well for Dick's Sporting Goods

Deliberate style by founder's son has retailing chain closing in on industry's top perch

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In 2001, brokers for the new Mall at Robinson had a lead on a sporting goods chain interested in opening a state-of-the-art, two-level store. Trouble was, the potential tenant was Indiana-based Galyan's Trading Co. Officials at rival Dick's Sporting Goods, headquartered in neighboring Findlay, were not amused.

Tony Tye, Post-Gazette
Dick's new headquarters in Findlay is home to 600 employees. The facility includes a racquetball court, running track and a restaurant named to honor the first Dick's store.
Click photo for larger image.
Dick's Sporting Goods Inc.
History: Founded by Dick Stack in 1948 as a small bait-and-tackle shop in Binghamton, N.Y.
Revenue: $2.2 billion in fiscal 2003, based on combined revenues of Dick's and Galyan's operations
Number of stores: 233 stores in 32 states
Employees: 17,500.

Dick's staff intercepted the lease, much as they did a few years earlier when Galyan's was close to taking a spot at the Waterfront shopping center in Homestead. "We defended our turf," said Dick's Chairman Ed Stack. "We wrestled both of those deals away from them."

Sometimes it takes a little grandstanding, a little adversity to get this company moving. Indeed, Dick's was founded in Binghamton, N.Y., by Ed Stack's father more than 50 years ago after an employer told him he would never be a good merchant. This summer, the retailer bought out the competitor that kept trying to encroach on its turf, speeding its ascension toward the top of the specialty sporting goods ranks.

The sports store wave Dick's is riding is being fed by Americans' growing pursuit of all things outdoors and athletic, from the standard hunting, fishing, golfing and home fitness to kayaking, hiking, biking and even mountain climbing. And while Wal-Mart, Target and other mass merchandise giants may generate more sales of sports and outdoors equipment just by virtue of their sheer size, Dick's and others of its ilk continue to grow by offering a broader and deeper selection of goods.

Still, hustling for the top spot will drag on for a while as the sporting goods business continues its evolution from an industry populated by small regional shops such as that first bait-and-tackle Dick's to dominant chains selling a little bit of everything. The National Sporting Goods Association this month estimated sales from U.S. sporting goods stores grew 25 percent between 1997 and 2002, topping $25 billion, not including athletic footwear stores, but that the top five sporting goods retailers still account for less than 11 percent of total sales in that category, vs. almost 45 percent concentrated among the top consumer electronics retailers.

That leaves plenty of room for more consolidation in the industry, though Stack suggests his preference is still to grow by opening his own stores, not by buying others. Dick's decision to acquire Galyan's and its almost 50 stores for $362 million -- pushing the combined operation to No. 2 in the sporting goods retail arena, with a combined $2.2 billion in sales last year vs. $2.44 billion at No. 1 The Sports Authority, based in Englewood, Colo. -- was driven more by opportunity than desire.

Tony Tye, Post-Gazette
Dick's Sporting Goods' Chairman and CEO Ed Stack, right, and President and COO William Colombo.
Click photo for larger image.

In fact, the Galyan's buyout might never have happened without that confrontation at Robinson three years ago. Dick's officials were not eager to build big, complicated stores and weren't particularly impressed by Galyan's results at its stores, which primarily were two levels and larger.

Dick's already had tested a two-level store in the mid-1990s in Hartford, Conn., and concluded a rapid expansion of the chain would be easier with the one-level model it had come to rely on. But in thrusting itself in to block Galyan's from moving into Robinson, the conservative retailer dared the risky maneuver of opening a two-level prototype on its own doorstep. Failure would have been both public and embarrassing.

The risk, once taken, opened new doors. Dick's opened a second, two-level store in Richmond, Va. Within a couple of years, the staff had become so comfortable running the models that executives decided to go after Galyan's itself.

The acquisition, which closed in July, was seen as a logical move in the industry. Yet it seemed to stretch the carefully crafted game rules Dick's has written for itself. The price was a little higher than some analysts thought the struggling rival would fetch, particularly given that Dick's and its chairman had a track record of moving deliberately, not making a fast break for the end zone.

While competitive, Ed Stack was "conservative as a risk taker," said Glenn Small, an executive with the Binghamton office of M&T Bank. Small was formerly with Binghamton Savings Bank, an early lender to Dick's.

The mix of ambition and conservatism that permeates the retailer's culture may be a nature/nuture thing -- both in the genes and the by-product of tough experiences.

Company lore describes founder Dick Stack being goaded into opening the first store in 1948 after his boss at a small Army & Navy store ridiculed his proposal to sell fishing gear. He would eventually expand the first store and later add a second, larger location.

When his oldest son came into the business after graduating from college in 1977, the younger Stack wanted more and bigger stores. His father said no. "At the age he was at, his risk tolerance was very low," said Ed Stack. "And appropriately so."

Eventually, the five Stack children bought their father out. Ed Stack quickly established a board of directors for the small business, including outsiders to help identify potential investors and provide a sounding board. Almost two decades later, Lawrence Schorr, a Binghamton attorney who helped with the transfer of ownership, still sits on the company's board.

New stores were added. The company, dominant in the Binghamton market, moved into other upstate New York markets. And Stack built a support group as he went along.

Kids from Binghamton's East Side worked in the stores growing up and a number stayed to take management jobs. Family members worked in the business. Stack spent six months recruiting his former college roommate, Bill Colombo, away from a promising career with J.C. Penney to the tiny four-store operation.

Now president of the 221-store Dick's chain, the buttoned-downed Colombo initially made up his job as he went along. He helped out with human resources, buying licensed merchandise, choosing store sites. "Ed and I would get in the car and drive around and look for busy shopping areas."

Still restless, Stack couldn't build the business he wanted from his small hometown city. Already, the company's board regularly gathered in Philadelphia and Pittsburgh, going wherever US Airways flew and had meeting rooms.

Dick's moved to Pittsburgh in 1994 -- a move later hailed by local economic development types as an example of the region's strategy of attracting promising companies -- and brought along 49 of its 51 main office employees.

It has since grown to 600 main office employees, who are settling into a new 200,000-square-foot headquarters just off Route 60 near the Pittsburgh International Airport. The setting includes a racquetball court, running track and a restaurant named to honor the first Dick's store. Plans already are under way to expand into a second, 200,000-square-foot building within two years because of continued growth, aided by the Galyan's acquisition.

As welcome as the growth is locally, Dick's almost didn't survive its move here. At about the same time it arrived, the retailer added 18 new stores to a base of 22 and quickly "developed an acute case of indigestion," said Stack, ruefully. The new sites sucked enormous piles of capital.

The company was forced to renegotiate with its banks and slam the brakes on new store development. Stack's careful relationship building helped. "We had venture capital people that stayed with the company longer than they usually do," said Schorr.

Michael Hines, chief financial officer then and now, worked with investment bankers to figure out what numbers to focus on to avoid another wipeout. "We had seen a number of other sporting goods retailers go out of business and we were determined that was not going to happen to us," said Stack.

They decided the key to freeing up cash, boosting profit margins and keeping shelves stocked with items customers wanted was a financial barometer known as inventory turn. The term refers to how quickly inventory is sold and replaced during a given period. A pair of Nike sneakers sold the first day, perhaps even before the vendor's bill comes, is more profitable than one that has to be marked down three months later.

By analyzing the sales of each item in stock and trying to figure out why sales of hiking boots or fishing rods in one market beat those in another, Dick's has significantly improved its inventory turn -- and its balance sheet. It now turns its inventory 3.69 times compared with the sporting goods category average of 2.59.

Moreover, though it posted a net loss in its just-completed third quarter because of merger-related costs associated with the Galyan's acquisition, Dick's has become consistently profitable. Its stock price earlier this month hit $38.40, an all-time high since it went public two years ago.

Indeed, aided by consistent sales growth and earnings gains, the stock has appreciated more than 180 percent since April 2003, noted Parker/Hunter analyst Steven Baumgarten in a recent report. He recently did downgrade his recommendation on Dick's shares to market performer -- not because Dick's prospects aren't good but because the stock has risen so much that it hit his price target.

The change at Dick's took time. People who had pulled up roots to follow Dick's and Stack on their march through the industry's ranks found themselves instead living through the company's near-death experience in the mid-'90s. "We haven't forgotten those days," said Stack. "It's embedded deeply into the culture of this company. That's why we pound home these financial metrics down to the basis point," he added, emphatically.

That's why in an industry known for bumps and bruises, analyst Bob Simonson of William Blair & Co. in Chicago feels a certain amount of confidence that he doesn't have to worry every single quarter about whether Dick's is going to miss estimates because of the weather or some other one-time event.

Simonson, whose firm co-managed the initial public offering, met Stack when the retailer was preparing to start trading on the New York Stock Exchange in the summer of 2002. The Dick's chairman struck him as an intense man who had pulled together a group of people he trusts and willingly listens to them.

The early reliance on homegrown talent -- some of whom handled the growing company's demands better than others -- and the company's emphasis on privacy did leave outsiders concerned about a certain sense of insularity at the retailer.

But Dick's has opened up a bit since the IPO, and its inner circle has expanded to include some unfamiliar faces. The company has hired executives who have spent time at retailers such as Jo-Ann Stores, Famous Footwear and Office Depot. One recruit was even hired away from Galyan's before the acquisition.

Despite the new faces, the hard-won culture of financial discipline still guides decision-making. That is reflected in the real estate strategy.

Dick's entered North Carolina with one store and then sat back to figure things out. The retailer found it was too early sending in winter jackets and too late taking them out. Then it was too early in pulling the golf equipment and too late getting it back in. So it refined its strategy there as it learned the market.

Now, five years later, Dick's calculates it is the largest sporting goods retailer in the southern state. Winning that title was not as hard as it should have been. Sports Authority -- acquired last year by Colorado's Gart Sports Co., which retained the Sports Authority name -- was headquartered in nearby Florida but never established much of a presence in North Carolina.

Stack is critical of sporting goods chains that have tried to be national by skipping the core of the country in favor of high-profile markets such as California. "We'll do it one step at a time, over time," he said.

Some steps, of course, may be giant ones, which is what the Galyan's deal was. It sped Dick's entry into markets such as Denver and Chicago, in part because Galyan's brought with it detailed sales and marketing data that Dick's otherwise would have had to spend years accumulating. But acquisitions, Stack reiterates, are not his preferred expansion strategy. "We're not looking to go roll the industry up."

Slow and steady is fine with Linda R. Killian, portfolio manager of the IPO Plus Aftermarket Fund in Greenwich, Conn., which held 15,000 Dick's shares as of Sept. 30. In her judgment, the company has avoided placing its stores too closely together -- a trait she thinks outdoor competitor Gander Mountain may be doing in Texas.

Killian believes the Dick's format, which targets sports enthusiasts rather than casual customers who might pick up a soccer ball at Wal-Mart, should translate as well in Indiana as it will in California when the company finally gets there.

Dick's has never seemed completely comfortable with being public -- the family retains control of the company through special stock holdings -- but Killian is fine with strategic details that management has been willing to divulge in part because things have gone well. "Basically, they've been executing," she said.

Being public has not brought only acclaim. In March, an analyst announced on a company conference call that he had a problem getting anyone to serve him in shoe departments in several Wisconsin stores. That didn't sit well with Stack.

After the call, he and Colombo headed over to a group of regional and district managers who were meeting in a hotel near headquarters. Now Dick's requires store personnel to check the footwear area more frequently to make sure customers were being waited on.

Teresa Lindeman can be reached at tlindeman@post-gazette.com or 412-263-2018.


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