Thursday, December 07, 2006

Dick’s Buys Golf Galaxy. Let the Consolidation Begin.

I had written in April that Dick’s had opened a prototype concept store called simply The Golf Shop. Now, it appears that Dick’s didn’t want to wait to see how it would perform. Instead they went out and bought Golf Galaxy for $225 million.

According to Edward W. Stack, chairman and CEO of Dick’s, he believes that the industry is ripe for consolidation, that’s why they swooped in and grabbed Golf Galaxy. With a sluggish industry firmly in a recession, some analysts wonder why Dick’s is willing to invest so much in the golf retailing space.

Dick’s Sporting Goods, with 300 stores and over $2.5 billion in sales, can afford to pick up Golf Galaxy and add its $250 million in sales to the balance sheet. They also will have more leverage with suppliers than Golf Galaxy did. Dick’s also has its own private label products and the Ben Hogan golf line that they can add to Golf Galaxy’s offerings.

What this is going to mean to the industry is that smaller retailers like GolfUSA, Golf, Etc., Nevada Bobs and others will continue to struggle and that franchised shop in your town might close. A small chain made up of independent franchised stores cannot compete with the better funded big box players. A Golf Galaxy or Golfsmith might have a 20-30,000 square foot store while a GolfUSA might have 2500 square feet.

Yet, these companies are not the competitors that Dick’s is worried about. It’s Golfsmith. With 62 stores and a strong balance sheet coming off an IPO, Golfsmith is the only pure golf retailer that Dick’s has to worry about.

As odd as this might sound, I believe that Golfsmith is a candidate for a takeover by one of the bigger fish in the sporting goods arena. With less than $400 million in sales, it might make a nice addition to The Sports Authority and their head-to-head, dog-eat-dog competition with Dick’s Sporting Goods.

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