Dick’s Sporting Goods ‘ acquisition of Foot Locker is a “strategic mistake” for the retailer, according to TD Cowen. The bank downgraded shares of Dick’s to hold from buy. Analyst John Kernan also lowered his price target to $216 from $245, implying just 3% from Wednesday’s close. Dick’s announced it would buy Foot Locker for $2.4 billion , in a deal expected to close in the second half of this year. Shares of Foot Locker rallied more than 80% on the news, while Dick’s fell 8%. DKS YTD mountain DKS YTD chart But Kernan said this deal is “likely to produce low returns” and present clear risks to synergies, integration and the structural foundation of Foot Locker’s business. Meanwhile, the return on capital is likely to be low, while raising balance sheet risks. He called the deal a strategic mistake and a “misallocation of capital” in a note released ahead of the transaction’s official announcement. “There is little to no precedence of M & A at scale creating value for shareholders within Softlines Retail. In our view, there are countless examples of M & A destroying billions of dollars in value since we have covered the sector.” This acquisition could also threaten the product portfolio at Dick’s Sporting Goods, such as by raising the company’s exposure to Nike to 38% of inventory purchases from 24%. “With FL Dick’s would be more exposed to Streetwear and lifestyle fashion trends, mall-based retail, and will be competing with smaller, more nimble sneaker retailers and marketplaces that are gaining share,” Kernan added. “We would prefer management to focus on the House of Sport, Next Gen Stores, and Gamechanger opportunities, which were lower risk and higher return on capital investments than purchasing Foot Locker.” Dick’s didn’t immediately respond to CNBC’s request for comment.
