It's How We Play the Game

by Ed Stack

  The threat called for serious hardball, and that’s what we played. We sent people into their stores every Saturday from one to three p.m., to casually take up positions from which they could see the registers and what their customers were buying. We’d keep track of all the transactions that took place during those two hours, then take sales readings of our own stores during the same period. We then took those comparisons and extrapolated their sales figures for the entire day and the surrounding week.

  We found that as our attack with decimators and other loss leaders continued over months, their sales started to deteriorate. Their “comp sales”—that is, sales at stores that have been open for more than a year, which is the measure by which retail performance is judged—were sinking. As they fell, we amped up our attack. We cut prices further. We increased our number of decimators. Before long, we were decimating them.

  One day I got a call from Stephen Bebis, who’d not long before taken over Sports & Rec. He said he’d love to have dinner. As a general rule, I’m always available to talk. If your competitor wants to sit down with you, you almost always want to accept the invitation. They’ll invariably tell you more than you have to tell them, because they called the meeting. They usually have something interesting to say. I told him I’d be happy to have dinner.

  Mike Hines, our chief financial officer, went with me. We met Bebis and his CFO at the Hyeholde Restaurant in Pittsburgh. They talked for a while about how the sporting goods industry needed to consolidate, how there were too many players running too many stores. Then Bebis got down to his point: What I’d like to do, he said, is buy your company.

  I’d had a feeling that was coming. Sports & Rec was significantly bigger than we were. I couldn’t imagine why else he’d have asked to meet. But I was proud of Dick’s. I was proud of the niche we occupied as operators of specialty stores clustered under one roof. No one else in the business took that approach. I wasn’t about to sell my family’s company. “Stephen,” I said, “I’m really flattered. But we’re not for sale.”

  Well, again, he said, I think the industry needs to consolidate, and we’d like to buy you. I told him again that we weren’t for sale. With that, the tenor of the meeting turned. “You do understand,” he said, “that if you don’t sell me your business, I’m going to put you out of business.”

  I didn’t say what I was thinking, which was, Fuck you. Instead I said something like, “Well, we’ll see what happens, and I wish you luck.” I knew the right thing to do was take the high road. I also didn’t want to do or say anything he could use to fire up his troops, the way his company had fired us up at Dick’s. But as soon as Mike Hines and I were in the parking lot, we were both saying, “Fuck that guy.”

  We viewed the conversation as a declaration of war, even more overt than their promise to decimate us. We resolved at that point to take the fight to them. We doubled down on our price cuts and advertising in the markets we shared with Sports & Rec. And just as had happened with Herman’s, when they started to have problems—which they ascribed to growing too fast—they closed their underperforming stores first, which happened to include those that competed directly with us. They attempted to rebrand themselves as Jumbo Sports, but they couldn’t get any traction, and their business continued to erode until 1998, when they pulled the plug.

  Like I said, there’s plenty of roadkill in this category of retail. We were happy to see Sports & Rec go but knew we hadn’t fought our last fight.

  CHAPTER 11 “YOU CAN GO BANKRUPT WHILE TURNING A PROFIT”

  Jerry Gallagher was an important source of wisdom and know-how over the first years of our partnership, and I looked forward to our conversations—I almost always ended them smarter than I’d started—and was inclined to heed his advice. But on one subject I thought he was flat-out wrong. I knew he was. And that subject was our chief financial officer, Mike Hines.

  We’d brought Mike aboard from Staples, the office-supply retailer, while we were in the process of moving to Pittsburgh. He was a Bostonian, a lean six foot six, and not easy to get to know. Once you penetrated his outer reserve, however, he revealed himself as smart, bighearted, thoughtful, intensely loyal, and a blast to be around.

  He was a first-rate CFO. Mike had a head for details and the courage to speak his mind. It’s all too rare in the business world to find an executive willing to tell his boss he’s full of shit, and the fact is, every boss needs such a sounding board. You may not always want it, but you certainly need it, and Mike wasn’t shy about playing that role. We complemented each other, too: I was pretty aggressive, he a bit more conservative. He was the perfect counterbalance to me, and I to him.

  Gallagher didn’t share that view. Early in his tenure, Mike was a bit unsure of himself at our board meetings. He might have been uneasy about having Dave Fuente sitting across the table—Mike had spent years at Staples, battling Fuente’s Office Depot, and I can imagine that it was a little unsettling to suddenly be working alongside a former nemesis. Or he might have been rattled by Gallagher’s inquisitional style at our early board meetings. Gallagher would ask Mike questions to which he might not have had immediate answers, then jump on him.

  Like I said, Gallagher could be arrogant. It was his style to sniff out what he perceived to be the other guy’s weakness and to pick at it, exploit it. Maybe he thought that toughened us up, that such testing strengthened our management team, but the tactic didn’t always yield the insight he thought it did. He just couldn’t see that we had a great CFO.

  Gallagher wanted Mike gone. “You need to fire him,” he told me on one occasion. I shut him down. “You see him at board meetings,” I said. “I see him in action every day. And he’s terrific. I’m not replacing Mike Hines.” A year later, I went to see Gallagher at his office in Minneapolis, and again he tried to convince me that I should fire Mike. As our meeting ended, he rode in the elevator with me and crossed the lobby. A cab was waiting just outside to take me to the airport. “I’m telling you,” he said, “I want you to fire Mike Hines and get a different CFO.”

  I looked at him as I climbed in the cab. “Jerry,” I said, “I am never going to do that.” He dropped the subject after that.

  I look back on those exchanges today, and I’m thankful that I didn’t listen to Jerry. If I’d done as he wanted, Dick’s would be a very different company, if it existed at all. I don’t know that we’d have refined our real estate strategy as Mike pushed us to do over the years, or taken the rational and tough-minded approach that we did to where we located our stores. I don’t know that we’d have knitted expense control into our culture to the degree we have, which has been key to our profitability. Mike was on top of our numbers, and he had an intense curiosity about every aspect of our business. He wanted to understand everything about merchandising, sales, and logistics. He had an intellectually curious mind, and he used it to make us better.

  Most important, I don’t know that we would have survived the biggest crisis in the company’s history. Though it wasn’t yet clear when Gallagher started arguing for Mike’s replacement, we were in trouble. Dick’s was about to hit the wall. And when I reflect on whom I counted on most throughout those days of existential peril, Mike Hines is at the top of the list.

  * * *

  Our move to Pittsburgh and the infusion of new capital marked the start of a period of crazy growth at Dick’s. And when I say crazy, I mean it: it was crazy to go as fast as we did. In 1994, we had twelve stores. By the end of the year, we had eighteen. Within another few months, we had twenty-two. And over the following year, we opened up eighteen more on that base of twenty-two. We went from being a little family chain to being a serious regional power. As this expansion played out, it seemed at first that all was well. Our sales were terrific. Our margins were solid. Our board was ecstatic. Our new partners had pushed us hard to grow at this clip. We’d delivered.

  It wasn’t quality growth, however. The view back then among big-box retailers was that you’d move into an
area to establish a beachhead—just get stores up and running—and figure out the details later. I thought we could handle it. Opening stores was routine for us now, and I failed to detect any reason to slow down. I was the controlling shareholder, and I went along with the other directors. We thought we had the Midas touch.

  But the fact is, we couldn’t handle it. We outran our capital structure. Our systems, such as they were, couldn’t keep up; we were merchandisers and marketers, not logistics-savvy. This breakneck expansion required having really sophisticated systems in place to move merchandise out of the warehouse and out to the stores, the right stores, at the right time. We had nothing like that; we were still using systems we’d put in place years before.

  Our management team was completely overwhelmed. We had too few people trying to do too many jobs, and many details slipped through the cracks. We pulled workdays that were ridiculously long and still couldn’t keep up with what was required of us.

  Not only did we open too many stores too quickly, we opened bigger stores—we introduced a new Dick’s prototype that measured a whopping sixty thousand square feet. The architecture we put into these cathedrals cost more to build—fancy floors, which were just plain stupid, because nobody noticed. Expensive fixtures. Design details that added up fast. The changes probably boosted our overhead with no return on our investment and did nothing to drive additional sales.

  We located them in markets where we really didn’t know what we were doing; in one year we opened three stores in Cincinnati, three in Philadelphia, and three in Baltimore, all cities in which we had little on-the-ground history or insight. We didn’t take time to understand the hunting and fishing business there. What did we know about the catfish culture in Cincinnati, or fishing for rockfish and blue crab in the Chesapeake Bay? Not much. That showed in low sales volumes. At the same time, we made other mistakes. These stores were overinventoried and cost more to run, market, and supply.

  Even so, we might have been okay. We could have trimmed our expenses on future openings and wrestled our spending back under control. But with runaway growth, we also lost track of our inventory. We were buying it without proper controls in place, and soon we had pallets stacked on pallets in the warehouse and had a hard time getting it moved out. The stores were already bulging with far too much merchandise. If you’d walked into a Dick’s in 1996, I doubt you would have detected any sign that we were in trouble, because the shelves certainly weren’t bare. There was an overabundance of stuff to buy. Because our inventory had blown up, we had to cut prices to reduce our surplus of merchandise, which drove down our margin rates. When our margins tanked, our profits plummeted. As my dad used to say, “You can go bankrupt while turning a profit, if you have everything tied up in inventory.”

  We did. Our available cash dwindled. Store sales couldn’t come in big or fast enough to keep up with our needs. Another indication that our operations were out of whack: our shrink numbers rose to 2 percent of sales, double what’s usually regarded in the industry as acceptable.

  All of these issues were directly tied to our expanding too fast. This wasn’t measured growth. In 1996, all of these factors converged simultaneously: We had no money and no prospect of getting more—we were up against our credit limit. We had too much cash tied up in too much inventory and no way to relieve that situation besides slashing costs and taking losses on our merchandise. We were crushed by high operating and capital costs that we’d brought on ourselves. We used primitive systems incapable of helping us run so large a company. And we were spread across too wide an area, without the logistics in place to keep merchandise moving smoothly.

  I was already losing sleep when I walked into Mike Hines’s office one day, and he looked up from some papers and said, “You realize we’re going to be out of money next month?” I said, “Yeah. I realize that.” But there seemed little we could do about it. We’d lost control of our ship. Any mistake you can make in retail, we’d pretty much made it. And we’d done it quickly. In 1994, we were healthy. Little more than a year later, we’d lost $13 million, and we didn’t have $13 million to lose. This is how bad it was: We set aside a conference room for our incoming bills. They were piled on a table there, all coming due, and we’d go through the daily reports from the stores to see how much they’d done in sales the day before, and decide which of our bills we could write checks for.

  We talked with our banks about restructuring our loans, to buy us a little breathing room. The banks refused. They wouldn’t lend us another cent. Our venture capital partners refused to put any more money into the company until we restructured our debt—which, of course, required money we didn’t have. We were stuck, and a complete collapse was approaching fast.

  There was some talk that we should file for Chapter 11. It took me back to my father’s stories about Hillcrest. What little he’d said about it turned on one decision he made—he refused to declare bankruptcy. He would not force his creditors to suffer for mistakes he’d made. He sold his house and car so that he could make everyone whole. I’d had that ethic drilled into me from childhood, and I probably felt even more strongly than he had that Chapter 11 was not an option. I was not going to use bankruptcy to escape the debt we’d piled onto the company, even if it made restructuring a lot easier. I could not bring myself to do that.

  We talked about selling the company. That conversation didn’t last long. Ours was a family business with a long and cherished history. But how to save it?

  Now, for the first time, I understood what my father had endured as the Hillcrest store tanked in late 1955 and early 1956. My days were filled with one piece of bad news after another. I remember apologizing to Bill Colombo one day, telling him how sorry I was that I’d gotten him involved in such a mess. You’d have been better off staying at Penney’s, I told him. I’d authorized our expansion. I’d pushed to build bigger stores. It was on me.

  As bad as the days were, my nights were endless and far worse. I lay awake, sick to my stomach, heart racing at the thought that we might have no way out. Man, had I screwed up.

  Then someone suggested we talk to GE Capital.

  I knew the name, and what I’d heard led me to believe that GE Capital was a lender of last resort, the one you turned to just before you called Tony Soprano. That’s an overstatement, a joke, but the company was known to be tough, very tough, in the terms and conditions it set for its loans. These days, GE Capital is a streamlined outfit that offers financial services to the aviation and energy industries, but in the mid-1990s it had a wide range of customers, from individual credit card holders to commercial real estate buyers to businesses, like ours, that needed capital. In many respects it resembled a gargantuan and multifaceted bank.

  We were facing a last-resort scenario here. It appeared that GE Capital might be willing to take on a risky proposition, like us, that the banks wouldn’t. So we called them, and they agreed to see us.

  * * *

  Mike Hines and I arrived in New York the evening before the meeting. I didn’t sleep much that night. If we didn’t make this deal, we were finished—we’d have to file for Chapter 11 and try to reorganize. I would be fired, and Dick’s would be owned by someone else. Forty years after my dad had been forced out of business at Hillcrest, here we were, a runaway success in every market we’d entered, and yet in the same spot. Forty years after he’d started rebuilding the company piece by piece, day by day, always scared to death of pushing too far, too fast, I had abandoned his conservative ways and brought it all to the brink of failure. The family business that my dad started. His name on the stores. I’d screwed it all up.

  I got up, went for a run to clear my head, grabbed a shower, and called Denise. She told me she hoped things would go well and wished me luck. I got tears in my eyes, talking to her. She tried to sound confident, but clearly, she was as scared as I was. We had five kids to feed, and we both knew that we were at the brink of losing everything. I got choked up to the point where I couldn’t speak and had to
end the call. I tried to pull myself together, knotted my tie, put on my suit jacket, and started out of the room.

  On the way I passed a full-length mirror and caught a glimpse of myself out of the corner of my eye. I stopped and turned around. You know you’re in a tough spot when you talk out loud to yourself while looking in a mirror, but that’s what I did: I looked myself right in the eyes and said, “You’ve got to toughen up. Get your shit together, Stack.” I stood up straight and buttoned my jacket. “You have to walk in there and talk to these guys like you don’t give a shit whether they give you a loan or not. Because you have confidence in this business, and you’ll turn this around.”

  I stepped into the hall feeling better—if not confident, exactly, at least clear in my thinking about what I had to do. A little while later, and a few blocks away, Mike and I took an elevator high into a Manhattan skyscraper, and we walked into a long conference room where ten or so men and women in suits sat around a table. They had me sit at its head, Mike just to my left, then fired a barrage of questions at us, one after another, about how we’d gotten ourselves into such a mess.

  Mike answered some, I answered others, and sometimes we’d piggyback on one another. We were a good team. Even so, the tone of the questions was in-your-face, and at one point I found myself thinking, Man, this isn’t going well. One of the suits asked why we increased our store size to sixty thousand square feet. We answered that sixty thousand had been a mistake, and that our future stores would be smaller. They busted us pretty hard over that, and rightly so.

  Another of our interrogators asked whether we had a computerized replenishment system that recognized when a store was about to run out of a particular item and automatically shipped new product. I answered, “No.”