You Say Sneakers I Say Trainers JDSports Finish Line
(Bloomberg Gadfly) -- JD Sports has outrun Sports Direct yet again.
The British seller of fashionable athletic footwear has agreed to acquire Finish Line Inc., a U.S. rival, for $558 million.
JD Sports Fashion Plc has already outmaneuvered Mike Ashley, who controls Sports Direct International Plc, by becoming Britain's most valuable sporting goods retailer in 2016, and lately widened its advantage. It looks to have done so again with Finish Line -- Sports Direct held early stage talks to acquire the U.S. group last year. It continues to hold about 10 percent of shares in the company, and has a further interest in another 22 percent through contracts for difference.
After conquering the U.K. sports retail market with its exclusive sneakers and "athleisure" clothing, JD wants to do the same in the U.S.
Through its relationships with the big brands, including Nike, it can get the latest styles into stores and enliven Finish Line's product range. That should make it more capable of competing with Foot Locker Inc. on sneakers. Adding JD's more fashion-focused clothing and its online prowess should provide other competitive advantages.
JD is forecast to have over 300 million pounds ($426.7 million) of net cash on its balance sheet in the year to the end of January, according to the Bloomberg consensus, so it can afford the deal. It is also picking up Finish Line for a decent price. Although it is paying a 28 percent premium to the closing share price on Friday, the stock has more than halved since December 2016.
But history is littered with examples of British retailers, emboldened by success at home, that expanded into the U.S., only to retreat a few years later. Marks & Spencer Group Plc and Tesco Plc are just two case studies. Even Associated British Foods Plc's Primark, which stands the best chance of cracking America, has found some aspects, such as different fashion tastes, more challenging.
What's more, the U.S. sports footwear market is off its game. Although Finish Line reported better than expected sales in late December, this followed three straight quarters of comparable sales declines.
Finish Line offers JD a seat at the table in future consolidation, but in the meantime, reviving the chain will be a big and expensive task. It has 556 stores and also operates concessions in Macy's, so it is exposed to both the troubled mall and department store sectors. And with the U.K. consumer in the doldrums too, JD can't afford to get distracted by its American adventure.
Shares in JD rose about 2 percent on Monday. So investors are clearly shrugging off the risks.
And they probably don't have to worry much about a threat from Ashley. For a start, the Finish Line board has also recommended JD's offer.
What's more, purchases of stakes in U.K. retailers including Debenhams Plc, investment in stores and a share buy-back program have all stretched Sports Direct's balance sheet. Net debt is forecast to be 435 million pounds at the end of April 2018. That doesn't much room for a chunky overseas bid. And anyway, with struggles at the House of Fraser department store, in which Ashley has a stake, as well as at Debenhams, Sports Direct may have opportunities closer to home. Still, Ashley is a shrewd operator, so a counter bid can't can't be completely ruled out.
Like one of its exclusive sneakers, JD is a hot property. But the U.S. market has defeated even the best British retailers. JD can't afford to let itself get pushed off of the track.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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