JD Sports $681 million acquisition of Shoe Palace

Acquisition overview:

UK retailer JD sports looks to further expand its influence in the US retail market through its acquisition of the privately owned Shoe Palace for $681m. JD Sports will pay $325m in cash and issue a 20% equity stake in its US subsidiary, Genesis, valuing at $356m, to the four Mersho brothers who own the business. The FTSE 100 company is funding this cash consideration from its cash resources and existing bank facilities. This acquisition follows from JD Sports’ ongoing attempts to improve its geographical footprint in the US, including its acquisition of US retailer Finish Line in 2018 for $558m. The agreement includes future exit clauses for the family, starting at the end of the financial year to February 2025, despite promises by the executive chairman to retain the ‘fun’ and ‘entrepreneurial spirit’ of the company.

JD Overview:

JD Sports is the leading trainer & sports fashion retailer in the UK, combining globally recognised brands such as Nike, Adidas and The North Face, with strongly growing own brand labels including Supply & Demand. JD Sports began with its first store in Bury, Greater Manchester in 1981 and has since expanded operations into Europe, South East Asia and the United States, reaching 19 global territories. JD Sports combines physical and digital retail, possessing a strong digital presence globally. 43% of revenue earned by JD Sports comes from the UK followed by 26% from the US.

Shoe Palace Overview:

Shoe Palace was founded in 1993 by a family of four Mersho brothers and has 167 stores across southern states including California, Texas, Florida and Nevada, alongside a strong online presence. Shoe Palace prides itself on its commitment and passion in creating a comfortable and welcoming experience for customers, allowing them to benefit from customer loyalty. Additionally, shoe palace is involved in a vast array of initiatives and charitable donations, helping to make a positive impact on their communities. In this way, Shoe Palace is differentiated from competitors, such as Altra Running, their social stand influences their consumer base. A study conducted by Edelman in 2018 found that nearly 2/3 of consumers around the world focused their buying decisions on the social and political stance of brands. This fundamental concept is one that Shoe Palace built its business model off of, allowing them to retain consumers and target a larger customer base.

Industry overview:

The global retail market is projected to have retail sales grow 7.2% in 2021, with the United States as the largest retail market. However, due to the current pandemic, this may not be the case. Falling rates of global GDP growth have had a large impact on household incomes, spending patterns and confidence. The US reported two consecutive months of declining retail sales whilst in the UK retail sales volumes fell by 3.8% (compared to October 2020) due to the ceasing of trade. This fall in sales indicated the necessary evolution of the classical business model required. It is apparent that driving growth through physical stores is no longer the way to increase sales, the move to a digital presence is essential. JD Sports, despite falling revenue of £176.3m, (2020-2021), was able to retain over 90% of revenues due to the long-term investment in their digital platform, spending over 77m in Feb 2020, further suggesting this need to move from ‘bricks to clicks’, Sport Tomorrow.

This market has increasing growth opportunities, with higher life expectancies, the standard of living is rising and thus there is a rise in ‘investments’ into higher quality sporting goods. The increased demand for ‘mature’ sportswear highlights a gap in the market. With large proportions of the elder generation being ‘active’, firms in this industry must invest in research, to meet the needs of this market segment. As well as this, sustainability and recycling have gained further importance in this industry, with Nike releasing their ‘Space Hippie’ collection, where they achieved zero waste and their lowest carbon footprint shoe. This was done through the collection of post-industrial scraps as well as plastic bottles and recycled materials. The ‘Space Hippie’ collection represented a step forward to sustainability and material circularity. As a result, firms need to implement more environmentally friendly measures, through the material used in their products or the use of paper bags.

In the UK, two key players in the sports fashion market are Sports Direct and JD Sports. JD Sports provide higher-end brands, attracting a younger demographic differing from the reputable Sports Direct which does not stock the most recent or trendy products but attracts a loyal and older customer. Whilst Sports Direct registered a revenue of £3.9bn in 2020, JD Sports reached a value of £6.11bn. Despite being the previous leading UK retailer for sports, until 2018, Sports Direct were unable to react fast enough to the growing trend in athleisure and focused on expanding its UK portfolio of retail businesses as opposed to establishing a stronger global presence like JD Sports.

To read the full report, visit https://www.manda-discovery.com/blog and have access to:

- Diversification & Scale Opportunities

- Industry Overview

- Cost Synergies

- Long term prospects

Written by Lea Ghandour