by Ed Stack
This time, however, we had a different balance sheet. We could weather the mistake. We marked down a bunch of stuff to move it out of the stores. We met our quarterly numbers, but the integration’s costs prompted us to lower our future guidance for the balance of the year. Our stock got hammered for a bit.
Bill found it a daunting task to work with Galyan’s people. He and I are big movie buffs, and we both like Gladiator, which opens with Russell Crowe’s character, the Roman general Maximus, overlooking a field at which a great battle is about to start. His vast army holds the high ground. A ragtag army of barbarians waits below. Maximus sends an emissary to seek peace from the other side, and the barbarian leader emerges from his army holding the envoy’s severed head. At which Maximus’s second-in-command says to him: “People should know when they’re conquered.”
That fall, Bill was talking with the Galyan’s folks about marketing, and they weren’t making it easy for him. He called me up and didn’t say hello. Instead, he began the conversation with: “I hate it when people don’t know they’re conquered.”
“What’s wrong?” I asked.
“We’re telling them how we’re going to market with this tab for a couple of Sundays, to drive some traffic, and they tell me, ‘Well, that’s not what we do. That’s not consistent with our brand.’ ”
I had to laugh at that. Their brand was history. “Well,” I said, “I’m sure you’ll figure it out.”
“I will,” he growled. Click.
And he did. For all the heartburn it caused us, the Galyan’s acquisition accomplished two important things for Dick’s. First, it got us into those key, highly competitive markets where Galyan’s had already built stores and established a beachhead. Today, the markets we picked up in the deal are some of our most profitable. Our two top-performing stores are in former Galyan’s locations.
And second, the transaction made us America’s biggest sporting goods chain, edging past the Sports Authority. A showdown loomed.
* * *
I love a street fight. As I’ve pointed out, half of my DNA comes from Dick Stack, and while our fighting styles might differ—Bruce Parker is the only guy I’ve come close to brawling with in my adult life—I do enjoy going at it with a competitor, the bigger the better.
Not long after we hit the billion-dollar mark, we had an off-site leadership meeting, and ahead of it I had everyone read Good to Great. It’s a terrific book by Jim Collins, who led a research team in studying the habits of companies that had “made the leap” to superior, long-term growth. The eleven he focused on included retailers such as Walgreens and Circuit City, and it famously included the idea that all of these great businesses had a “hedgehog,” a big, hairy, audacious goal that inspired passion in everyone who worked there—something that set them apart, that they did better than anyone else.
We had to identify our hedgehog. Collins encouraged his readers by asking, “What gets you excited? What do you, and we, do better than anyone else?” So I asked everyone in the room, “What gets you excited about our business? What are we really good at?” We went around the room. “Customer service,” one said. Another said he was “jazzed about the products we sell.” Someone else said, “Our marketing.” Eventually it was my turn. “You know what, guys?” I said, with just the hint of a smile. “I’m going to go to the bathroom and throw up, after what I’ve heard. I’ll be back in a couple of minutes.” I got up and walked out of the room. I’m sure they were all wondering what was going to happen when I came back.
Which was this: “Really?” I asked them. “Is that what we’re passionate about—customer service? Important, yes, but is that what gets us up every morning? Is it really the content we sell?” No, I told them. “What gets us up every morning? What gets us really jazzed? We love to be in a street fight. We love a street fight. We loved fighting Galyan’s. We love fighting Sports Authority. We love to be in a street fight, and we’re good at it.”
All around the room, heads nodded and people yelled, “Yeah!” Because it’s true: as a company, we love the game. We love the competition. Retailing is a sport, as surely as the football, baseball, and basketball we help our customers play. We’re in it for that struggle under the boards, for that lunge past a swarm of tacklers that ekes out a first down, for that deciding “this is it” play to get the win.
Soon enough, we had ourselves a street fight, because Sports Authority came after us. They made noise that they were going to enter the Ohio Valley, which we absolutely owned. They were going to come into our stronghold and compete head-to-head, and beat the hell out of us.
Sports Authority was a roll-up of four different sporting goods retailers that had been around for a long time. In 1928, a paperboy started Gart Bros. Sporting Goods in Denver, and did it selling fishing rods that he borrowed $50 to stock—a story a lot like Dick’s beginnings. Gart Bros. opened its first superstore in 1971 and swallowed up some smaller chains to become a regional power in the mountain states. At the same time, Sportmart, out of Chicago, grew to sixty-odd stores in nine Midwestern states and California. Gart and Sportmart merged in 1998, and in 2001 the combined company merged with Houston-based Oshman’s, which had fifty-eight stores.
Meanwhile, The Sports Authority was created by a group of venture capitalists in Fort Lauderdale in 1987. It was owned by Kmart for a while, then spun off, and grew to two hundred five stores in thirty-three states. We’d been eyeing them as a threat for a long time, since years before Janet Hickey sang their praises during our walk-around in Buffalo. It was The Sports Authority that Jack Smith headed when Jerry Gallagher asked him about us and he blew us off as insignificant.
In 2003, Gart and TSA merged to form Sports Authority, minus the the, creating by far the biggest sporting goods retailer in the United States. So skip ahead seven or eight years, and we’d just had our best quarter ever. We’d absolutely blown away Wall Street’s expectations, and our comp sales were among the top in retail. We were just about to have our fourth-quarter earnings call when Sports Authority started this talk of moving onto our turf, and despite our amazing quarter our stock price got crushed.
I don’t often get upset about our stock price because I figure that if the Street gets it wrong one quarter it’ll correct its mistake the next time. But I was steamed in this case because our stock price had been taken down by a subpar retailer that I knew couldn’t do what it said it would do. Sports Authority was poorly run. Its merchandising philosophy wasn’t coherent, perhaps because it had never quite managed to fully systematize and consolidate all of its component parts.
Because it was warehouse format, brands such as Nike didn’t give them their best lines, and some vendors didn’t sell to them at all. Even within the warehouse-format world, they’d never impressed me. Sports Authority paid almost zero attention to customer service, and it tended to carry entry-level, lower-end brands. We carried products for the beginner, the intermediate athlete, and the enthusiast; Sports Authority carried stuff for the beginner up to maybe the middle-intermediate. So if you were a real athlete, you’d find little of interest there. You’d come to us, instead. We had them dead to rights on customer service. We had a much better selection of product. Our stores were bright, clean, and well organized, while theirs consistently struck me as dingy. So when I heard their talk about taking us on, my first thought was, Bring it. We were in the mood for a fight.
I shared my feelings at a quarterly leadership meeting the afternoon the stock fell. We gather about 150 of our top management people for these meetings so that they can ask about what’s going on and we can explain what we’re thinking. I got pretty revved up talking about Sports Authority, as well as some other retailers that had badmouthed us. “The only thing we can do is to kill ’em all,” I said. “Our objective is to kill them all. We’re going to do it legally”—heated though I was, I thought it important to add that—“but we’re going to go out there, into a street fight, and we’re going to kill them all.”
We
didn’t wait for Sports Authority to come to us. In market after market, we’d open a store right on top of theirs. In part, that was unavoidable, because they were already established in the markets we wanted. In general, they did a poor job of selecting real estate. While Dick’s aimed for locations in the middle of power centers, surrounded by the kind of stores that drive traffic—Walmart, Target, Costco, Best Buy, and so on—many Sports Authority locations were slightly off the mark, I suspect to get lower rent. The old adage “location, location, location” is on the money when picking store locations. We’d aim for the best spot we could find, and if that was right across the street from Sports Authority, that’s where we’d go.
But we wanted to be close, too. It meant a shopper would encounter both of us simultaneously and have to choose. We weren’t bashful about forcing the choice. We beat the other guy on excitement, expertise, selection, and service, and at least tied them on price. So we’d open across the street, leveling the playing field from a real estate standpoint, and let the best store win. Which we knew would be us.
The first couple of markets we tried this, we beat them bloody. Feedback from the marketplace was that as soon as we opened nearby, a Sports Authority store would lose 20 percent of its sales. When, on the other hand, they showed up in a city after we did, we experienced little or no downturn in our business. They had virtually no impact.
That signaled that our real estate strategy was more than just ballsy, it was good. And as time went on, we noticed an interesting shift taking place among commercial real estate developers. These folks have preferences when they’re planning the mix of retail in a shopping center. They’ll choose a Target over a Kmart. They’ll shoot for Best Buy over other electronics stores, and Bed, Bath & Beyond over other home goods stores. And with time, as word spread that we were doing really well, they’d call us first when seeking a sporting goods retailer tenant. As we received those calls in one market after another, Sports Authority was squeezed out of the prime real estate.
We were winning the street fight. And this was on their turf, or in cities new to both of us. As for the Ohio Valley, they never tried to open there. Not a single store.
CHAPTER 16 “THOSE YANKEES. I WAS SO DISGUSTED LAST NIGHT WITH THOSE BOYS.”
Years ago, I asked our head of human resources to conduct what you might call a DNA analysis of the company’s best employees. Instead of asking for hair or blood samples, we asked several dozen of Dick’s most successful people, at every level of the organizational chart, to participate in an array of personality tests administered by an industrial psychologist. What we learned was that these were among the most competitive people you could ever hope to meet, but they weren’t competitive with each other—their drive to succeed was outwardly directed, at people and entities outside Dick’s. They weren’t out to keep others from advancing within the company. They weren’t bent on getting ahead of the guy at the next desk. They were committed to succeeding with their coworkers.
That was gratifying to learn, though not a surprise. We’ve always been wary of showboaters with too much self-regard, the type who catch a twelve-yard pass and act as if they’ve single-handedly won the Super Bowl. That type of character reminds me of an acquaintance of mine who lived in New York City and every day drove FDR Drive, up Manhattan’s East River waterfront, to get to work. While he was at the wheel, he had two objectives. The first was to get ahead of the car in front of him. The second was to block the car behind him from passing.
A lot of companies have cultures that reward that style of naked ambition. They think a guy who’s willing to submarine his coworkers to get ahead is hungry. At Dick’s, we’ve never had that culture, and if someone like that slips through our hiring process and becomes part of the team, it isn’t long before he reveals himself and the team cuts him. We try to reward people who understand that they have a job to do, and do it well, but who recognize that their job is part of a greater whole. People who see that success relies on the same three ingredients in both business and athletic contests: discipline, execution, endurance.
You can’t get ahead at Dick’s without discipline. Our expectations are high. You have to use your time well. Hitting your numbers requires focus. You have to execute, too—to finish what you start. You have to think clearly. And neither matters if you aren’t able to keep doing it, day after day, year after year, improving all the while. As our mission statement says, through the relentless improvement of everything we do.
We try to build endurance into our team by insisting that our people maintain a work-life balance. We don’t have meetings at the office at five p.m. and never schedule them on weekends. We try to provide our teammates plenty of time with their families. We figure that’s important to keeping them.
And we’re eager to keep those who staff our stores because they’re the most important players on the team. Our organizational charts are in the shape of an inverted triangle. I’m at the bottom, the least important player, because I’m the farthest from day-to-day contact with our customers. The closer you get to the customers, the higher up the triangle your position. Our store associates are at the top. This customer-focused, teamwork-based culture has been at the heart of the company’s growth and success.
At the risk of sounding boastful, let me walk you through the numbers our team has delivered for Dick’s in the first few years of the millennium, because they underline just how quickly we went from regional to national. At the end of 2001, the year we broke over a billion dollars in sales for the first time—$1.07 billion, to be exact—we made $23.2 million in net income. We had 125 stores, all but a handful east of the Mississippi. Two years later, our sales had increased by 40 percent, to $1.47 billion; our net income had more than doubled, to $52.4 million; and our store count had climbed by 38, to 163.
It had taken us 53 years to reach the billion-dollar mark. We achieved $2 billion just three years after the first. In 2004, we posted $2.1 billion in sales and, helped along by our acquisition of Galyan’s, operated 234 stores in 33 states. That was 71 more stores than we’d had the year before. We now had a two-store toehold in Texas; a strong presence in Minnesota, Missouri, Kansas, and Colorado; and far-west outposts in Utah and Nevada. We expanded our distribution center outside Pittsburgh and started revamping the Galyan’s warehouse outside Indianapolis to try to keep up.
Just two years later, in 2006, we reached $3.1 billion. We achieved a 6 percent comp store sales increase that year, too, and ended the year with 294 stores. So, to recap: we hit a billion dollars in sales in 2001, two billion in 2004, and three billion just two years after that.
With the exception of the Galyan’s takeover, which got us forty-eight of their stores, this expansion was primarily organic—we built our own stores from scratch in new markets, or in markets where our sales and research told us we needed a bigger presence. We preferred that do-it-yourself growth over swallowing up competitors; between inventory issues and cultural differences, Galyan’s had left us with a pretty long-lasting case of indigestion.
But in 2006, golf was nearing a peak in popularity around the country, and we had an opportunity to buy Golf Galaxy, a chain based in Eden Prairie, Minnesota, outside of the Twin Cities. The company had been founded by two guys who’d worked for Best Buy early in its history and rose through its leadership while it grew into the country’s premier big-box electronics retailer. Both avid golfers, they decided to apply what they’d learned to a golf-only superstore concept and opened their first Golf Galaxy in 1997.
Unlike Galyan’s, this was a friendly takeover. They agreed to be bought for $226 million, which amounted to a 20 percent premium on their stock price. We got sixty-five stores, each as much as twenty thousand square feet, in twenty-four states, and instant status as the number one golf retailer in the United States. With a well-funded parent company, Golf Galaxy was insulated against the ups and downs of the golf category.
We inked the deal in February 2007 and built on the purchase by opening
sixteen new Golf Galaxy stores; even so, we paid off the entire cost of the buyout by year’s end. They were beautiful places, with indoor driving bays, full-sized putting greens, and state-of-the-art golf course simulators and swing analyzers.
Then, late in 2007, we bought a privately held, fifteen-store chain of Southern California sporting goods stores. Chick’s, founded in 1949, was one of the biggest regional chains in the country, with big-box stores that were about the size of our one-story locations. We assumed the company’s $31 million in debts and paid its owner, Jim Chick, $40 million in cash, for a deal totaling $71 million. In retrospect, that was a bargain, because it gave us an immediate strong presence in Los Angeles. Dick’s was coast-to-coast.
But in hindsight, we should have waited on the Golf Galaxy deal. Unknown to us, the housing market was about to collapse, and when that came to pass in 2008, it dragged the entire US economy into the abyss. Job losses numbered in the millions. Discretionary spending dried up—and you’d have a tough time finding purchases more discretionary than golf clubs.
We struggled through those lean times. Company-wide, our comp sales were down by 4.8 percent. Our cash flow fell from $263 million to $160 million. Still, we were much better situated to ride out the crisis than most retailers. For one thing, we had zero debt; our close call back in the mid-nineties had taught us hard lessons. For another, we knew that liquidity was more important than earnings in such a crisis. We trimmed inventory by nearly 13 percent, kept our short-term borrowing low and our expenses down, and against all odds, broke four billion dollars in sales for the year.