DKS: Pays the Piper

DKS’ $145mm intangible write down (36% of total) is proof that overpaying at the peak will ultimately catch up with you. I never liked DKS, but there are potentially positive ramifications.

I always scratched my head on the kind of multiples DKS paid for its acquisitions. Many others did as well. Management always had a great story to tell about synergies, and reasons why paying up for superior real estate would yield superior returns. I never got it, and still don’t.

The good news for DKS is that the quarter appears to be coming in at least at the mid-point of guidance. But let’s remember that we’re still talking a -8.6% comp and 15% earnings decline (on 7% square footage growth).

Two possibly positive considerations.
1) DKS will finally change its tune and focus on growing organically and investing to drive traffic in its own stores instead of relying on new assets to take the top line higher. After all, despite my views on financial management at the company, DKS remains the best concept in this space.

2) Let’s not forget Sports Authority, which was bought by Leonard Greene in 2006 for $1.425bn, or 7.6x EBITDA. But that was with TSA at a peak 7.6% EBITDA margin. Since then, it has closed stores, and margins initially improved. But if DKS is comping down 8.6% -- I’d be shocked if TSA was not down double digits. In hindsight, this transaction was done for something closer to 12x EBITDA. What happens to a highly-levered TSA in this climate? If this domino falls (like so many SG retailers before it have), it would be a huge long-term positive for DKS as TSA represents 14% of industry capacity.