Simply Amazing. Is there any other way to describe 2005 in the sporting goods industry? Back in the Sports Executive Weekly review of 2004, we made the statement that the blockbuster deals of the previous two years would be harder to find down the road. Surprisingly, the biggest deals were apparently already in the on-deck circle as we entered 2005 and a few more may be lurking just around the corner.
The year was not unlike 2004 in that consolidation continued and this once-fragmented industry started to look a bit heavier at the top. It was a remarkable year for sports brands and retailers to enter the public markets as industry stocks continue to outpace the growth of the S&P 500 and the Dow Industrial averages, while Under Armour posted the biggest IPO for a U.S. company in more than five years. Private equity firms seeking a home for hoards of cash again played a role in driving up valuations across the board, which then stimulated even more interest in the market.
But 2005 was also the year that saw some of the biggest “serial consolidators” take a breather to focus on operational performance and integration. The years other big story — other than the mega-deals initiated or completed — could have been that neither K2 Inc. nor Nike Inc. made an acquisition. A number of companies also made moves that helped them diversify their portfolios for the challenges ahead in a rapidly changing market. While the biggest guys on the block took a break, SEW expects them to be back and possibly sooner rather than later — as they move to consolidate the industry further. Yes, SEW believes that the potential for a few more mega-deals still exists in the market and 2006 could be the year that sees the top of the curve for consolidation before the market starts to open up again for regional retailers and new brands.
The year also saw the shifting fortunes of a number of brands, particularly in the U.S. as Europe became a drag to brands that have been stronger there historically, while the region became the savior for some U.S. brands that slowed here.
There may not have been as many merger and acquisition deals in 2005, but the deals that did happen will have a profound impact on the market.
Perhaps the deal of the year — and one that will be hard to follow anytime soon is adidas acquisition of Reebok International Ltd. The year started with RBK COB/CEO Paul Fireman in firm control of the destiny of the company after the ouster of former president and COO Jay Margolis, but the year ended with many a key manager looking for the next gig as the company starts to make transitional moves to slip in under the adidas umbrella. Fireman will walk away from the deal a lot of cash and more than a few long time employees will finally get a chance to cash in on their years of service after adidas buys the company at a 37% premium to the RBK share price at the time of the deal.
The major conversation here is still about what adidas plans to do with the Reebok brand and the other assets, but there appears to be little dispute outside both companies that there will be a mid-market positioning strategy for the Reebok brand that supports adidas efforts to move up the pyramid. Expect to see an adidas logo on NFL and NHL players next year in an effort to give adidas much more exposure in the U.S. to accompany their efforts this summer in Europe with the World Cup.
SEW expects this deal to close sooner rather than later in the new year so the merged entity can play the “lost quarter” angle for Reeboks fourth quarter.
While not the type of deals that will change the U.S. landscape like adidas/Reebok, Amer Sports acquisition of Salomon and Quiksilvers acquisition of Rossignol will have a significant impact on the global outdoor and snow sports market. Perhaps each deal was made all the more important after K2 Inc.s move the prior year to consolidate its hold on the market with the Volkl, Marker, and Marmot deals, which enabled Amer to counter KTOs drive to become the leader in sporting goods hardlines in the industry. The Quik/Rossi deal takes the traditional summer action sports brand down the same road as VF Corps Outdoor Coalition as both move to create a broader outdoor industry footprint that includes the action sports market, but also gives Quiksilver a solid platform for more growth in hardlines, much the same as it did in footwear after the DC Shoes deal in 2004.
On the retail side of the coin, the big sporting goods guys all took a break to digest their most recent deals, but that didnt leave the market without a story for 2005. Technically, the merger of Sears and Kmart wouldnt be seen as a sporting goods industry deal, but the sheer volume done by both companies in the market Kmart in hardlines and Sears in branded footwear and apparel – could provide one of the biggest stories for the coming year as well as management of the new Sears Holdings makes decisions about product mix, brands, and focus for the Sears and Kmart nameplates. The merger has already created issues for more than one hardlines vendor as the merged company makes joint decisions on brands to carry forward. On the softlines side, its a bit different after Nike, Inc. made a decision to pull the Nike brand from Sears. There are expectations that this move creates a $50 million open-to-buy opportunity for other brands willing to service Sears with white-leather-footcovering, but brands must now assess the potential for product rollover as Sears Holdings works to re-capture control of the Kmart footwear departments from the current licensee, Meldisco.
Many expect that the merger of Federated Department Stores and May Department Stores creates bigger opportunities for brands that have performed well for Federated, while creating headaches for those that were stronger on the May Company side. Regardless, the deal will shutter a number of mall locations and take a chunk of real estate out of the mix — including a number of anchor locations — and sees Macys become a true national brand. The deal also opens up real estate for more sporting goods anchors.
