If Dick’s Sporting Goods Inc. can turn around Foot Locker Inc. — a feat the footwear chain has struggled with on its own — Nike Inc. stands to emerge as a big winner.
The two sportswear chains announced last week that Dick’s had reached a $2.4 billion deal to acquire Foot Locker, whose slow recovery hasn’t impressed investors. Together, the retailers account for nearly $5 billion — or 10% — of Nike’s revenue, according to a Bloomberg estimate.
A successful tie-up could boost Nike as the company attempts its own comeback effort after a difficult year of lackluster sales and corporate layoffs.
Nike Chief Executive Officer Elliott Hill, who came out of retirement to take the job in October, has been working to revive relationships with his retail partners after previous management shunned many wholesalers in favor of Nike’s own stores, websites and apps. He said in a statement that Dick’s and Foot Locker have been “valued partners for decades.”
“I am confident that together, they will help elevate sport and continue to accelerate the growth of our industry,” said Hill.
Related: Nike CEO Turnaround Rests on Unraveling Predecessor Mistakes
Wall Street, however, is concerned about whether Dick’s can turn around Foot Locker’s fortunes. Shares of Dick’s have fallen 12% since the acquisition was announced.
The deal would be “a strategic mistake” for Dick’s, TD Cowen managing director John Kernan said in a note to clients. He said there’s “clear structural risk to Foot Locker’s business” that may drag its potential new owner down with it.
Dick’s and Foot Locker didn’t respond to requests for comment.
For Nike, the combined entity will have more influence than any of its other partners, boasting more than 3,200 stores worldwide. If the agreement goes through, about 38% of all Dick’s inventory purchases would come from Nike, according to TD Cowen.
“They wouldn’t have made this deal without getting Nike’s view,” said David Swartz, a senior equity analyst at Morningstar. “Realistically, both Dick’s and Nike want Nike products to be sold at full price, and as many as possible.”
Mending Ties
Dick’s and Foot Locker together will have more leverage in price negotiations with brands. The proposed deal comes as US retailers grapple with their exposure to imports from production hubs in China and Vietnam amid President Donald Trump’s trade war.
“Now, you can’t play Dick’s and Foot Locker against each other,” said Anthony Chukumba, managing director and senior research analyst at Loop Capital Markets, referring to brands’ negotiations with the retailers for exclusive products. “Now they’re the same thing and they’ve got more leverage.”
Nike’s relationships with its network of sports retailers has grown complicated in recent years. Previous management decided to cut ties with more than half of Nike’s retail partners and pull back from its partnership with Foot Locker, its closest ally in the US.
Foot Locker struggled for years to cope with a drastic reduction in new Nike products coming in, hurting sales and profitability. As the pullback sped up, management filled shelf space with Nike’s competitors, such as New Balance, On Running and Hoka.
Hill has made it a priority to rebuild that relationship with Foot Locker, pledging to investors that he’ll mend those fences. The two companies recently worked together on a new basketball section that’s now being rolled out in 100 Foot Locker stores.
Nike has enjoyed a better rapport with Dick’s, which was chosen as a key strategic partner while it was backing away from most others. The pair even integrated their loyalty programs.
“Dick’s already has a big seat at the table as it relates to footwear, especially as it relates to Nike,” said Mike Baker, managing director and senior retail analyst at D.A. Davidson & Co. “But that just doubled with this deal.”
This story was originally featured on Fortune.com
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