by Ed Stack
“How can you run a business like that?” he asked. The subtext was, “You people are idiots,” though in truth, we couldn’t replenish a lot of our merchandise that way, even with the greatest system in the world. Automatic replenishment works great at Walmart or grocery stores, where you’re selling bottled water and paper towels, but it doesn’t count for much when you have to order Nike products six months ahead of time.
They made us feel pretty stupid about our systems, nonetheless. When we’d been answering questions for a while I interrupted to lay out the situation in a more holistic fashion. “Let me tell you something,” I said. “We made a series of mistakes. And these are the mistakes we made.” I told them what had happened, then moved on to why it had happened: that we’d thought establishing beachheads in new markets was important, but we’d moved into too many, too quickly.
“And this is what we’re going to do so that it never happens again,” I said. “Our venture group will put additional equity into the business. We’re going to be disciplined from a capital allocation standpoint. We’ll be disciplined on expenses and growth. We won’t allow our growth rate to outstrip our capital.”
All told, the exchange went on for about ninety minutes, and I noticed this one guy sitting in the back, taking it all in, saying nothing—about forty years old, dressed impeccably in an expensive dark suit, white shirt, quiet but elegant tie. He was straight out of central casting for a banker.
The meeting ended with no promises made, but as I gathered up my papers this quiet observer came over, slid a chair up beside me, and sat on it backward, arms folded across the top of the chair’s back. I’m asked to speak to college business classes on occasion, and what happened next often makes its way into my remarks. The lesson it offers is that if you’re in a meeting and there’s a guy sitting off in a corner, not saying anything, that’s the guy you probably have to convince. He’s the decision-maker.
“Tell me the three things I need to do,” he said, “so that we can agent this loan.”
There were only two. I told him how much money we needed and when we needed it by.
He studied me for what seemed like ten seconds, his head cocked a little to the side, saying nothing. It was a long, strange moment: his eyes and his expression weren’t adversarial, not at all—he seemed to be seeking understanding, not delivering a challenge. I think he knew that for all the analytics, this was a gut-instinct call, and this silent appraisal was a form of due diligence. I held his gaze. Finally, he smiled. “We can do that,” he said. He shook my hand.
To this day, I don’t know who he was.
Mike Hines and I walked out in a bit of a daze. “What just happened?” Mike asked.
I was still trying to process it all, but I told him: “I think we just saved the company.”
* * *
In truth, we weren’t saved just yet, and the cure for what ailed us was, in some respects, mighty bitter medicine. This is a good place to make a point that took me a while to understand and that I now share with young people coming into our business, and with college students when I’m invited to speak to them. It’s this: Business success, or failure, doesn’t move in a straight line. There are highs and lows, so that although the overall trend of a company’s performance might be on the rise, it will incorporate a lot of ups and downs.
My dad ran a business that became a Binghamton institution in the decades after Hillcrest, but even so he lost money some years and faced many weeks when he wasn’t sure how he was going to make payroll. So it goes with most every company. Apple consistently ranks among the world’s most valuable corporations, but it got there only after a lot of missteps—its failed Lisa computer of 1983, Steve Jobs’s departure, the company’s near-failure. It returned to profitability with Jobs’s return, and the introduction of the iPod, iPhone, and iPad, yet even now, it experiences down quarters.
Even the most successful companies have to fight through tough times. There will be good days and great days. There will be bad days. And some days will be just flat-out awful. Dick’s has had its share of all of them. The day we met with GE Capital ranks among our best days, in retrospect. Some of the days that followed, on the other hand, were complete nightmares.
We returned to Pittsburgh with GE Capital having agreed to give us a credit line of $140 million. It was contingent on our venture capital partners increasing their investment. Problem was, those guys wouldn’t put in any more money until we’d restructured our debts, which we couldn’t do without the loan. So though we now had a commitment from GE Capital that promised to save us, we were still caught in a vise between forces we couldn’t control.
For more than a week neither side blinked, and my sleepless nights continued. Ultimately, the venture group didn’t want the company to fail—they already had a bunch of their money in it—so they agreed to end the impasse. Following Denis Defforey’s lead, they ponied up $35 million.
But that good day brought with it great compromise for me personally. Because with the additional investment came a shift in the board of directors: while I’d had five designees and our outside investors had controlled two seats, now the balance flipped, so that I had two, and they had five.
I still owned a big piece of Dick’s, and I remained its CEO.
But I no longer controlled my family’s company.
* * *
True to its reputation, GE Capital was tough. The loans we got from them had covenants attached, which restricted us to the point where we couldn’t do a whole lot without getting their permission first—we couldn’t take on any additional debt, for instance. We had to keep our capital expenditures within hard-and-fast limits, and they monitored a host of other metrics of the company’s performance, all of which had to fall within certain ranges. By any standard, it was a tough loan. It made the loan structure my dad had set up when we bought him out look like a piece of cake.
The money they made available to us was limited by our inventory—it followed a formula based on the value of our assets. Some of our inventory was set aside, right from the start, as a cushion, and we could borrow against a percentage of the remainder; from what I recall, it played out that we could borrow up to 50 percent of the value of 80 or 85 percent of our inventory. We had to be incredibly judicious about our spending.
Getting their money did not, in and of itself, save the company. It bought us time to make changes that we now recognized were past due. Our first move was to slow our growth. We halted new store openings. For about eighteen months we signed no new leases, and we revisited some of those we’d already signed—went back to our prospective landlords and asked to postpone our opening for a year, or to let us out of the commitment altogether. In general, they were good to us. They had practical reasons for that: they didn’t want to build us a store, force us to open it, and then watch us go belly-up and leave them with an empty building.
More fundamentally, we adopted a much more financially disciplined inventory system. We’d always had a model for what and how much we bought, but it had served as a guideline, rather than a set of hard-and-fast rules. No longer. The new system dictated how much of any category of products we could have in our inventory. It identified merchandise that could be marked down and how much. It set goals for receipts and incorporated sales plans for each store, each district, and the company as a whole. In short, we tried to assign measurements to everything we bought, everything we sold, everything we did. If a measure fell outside the range we’d set, we could identify the problem and fix it at once.
The new approach broke down our inventory to a granular level. While we’d had an “open-to-buy,” or limit on buying inventory, for categories before, now we focused it far more sharply. It was no longer “golf gear” we kept track of—now it was down to how many golf balls of a particular brand we could buy. Our open-to-buy on athletic footwear became scores of line items, one for each brand and style.
We were able to do this because we had a lot of data that we’d collecte
d over the years but never used to the extent we should have to manage the business. We knew how many golf balls we sold, how many golf tees, how many Nike men’s running shoes of a particular style. It was all in our records. We now loaded this data into our new open-to-buy system, and focused on controlling every aspect of our buying and how we distributed inventory among the stores. We developed a merchandising system that kicked out a daily report on sales by store, by category. It tracked our margins down to one-hundredth of a percentage point, and if we were off our margin targets by one-tenth of a point for two days in a row, bells rang and whistles blew, and we jumped in to find the cause.
This isn’t sexy stuff, but developing new systems saved us. In a few short months we became maniacally focused on the numbers, and over those same months our situation stabilized. We sold off our excess inventory. We found our balance. The crisis passed. And we resolved that we’d never find ourselves in such a tight spot again. Fear is a terrific motivator. My dad had known that all too well after Hillcrest, and now I understood it, too. We’d peered into the halls of hell, and we were never going back.
Funny thing: GE Capital turned out to be a wonderful partner. If we had an issue or wanted to do something different, they wanted to know about it and to understand our thinking. But I can’t recall a single instance when we were mulling some important action and they said no. Their covenants proved far less onerous than they’d seemed; in fact, they were easy to hit. They’d put those in place to keep us from getting ourselves into trouble, and once our new systems were installed and we were back on solid footing, with our inventory under control and our margins back to normal, the covenants were performance bars that we cleared easily.
All told, fixing all that was broken took a little more than a year. By early 1997, we were a far healthier company than we’d been before the scare. Hitting the “pause” button in our growth enabled us to take a more thoughtful approach to further expansion. And with our new systems, we had an almost microscopic view of Dick’s operations and a far better sense of what we were doing and why.
We began opening new stores again, at a much slower pace, and these stores marked our return to the fifty-thousand-square-foot model we’d debuted at Vestal and operated successfully in Pittsburgh. It was a more comfortable and efficient size but still big enough that walking into a Dick’s brought a wow from shoppers. The first of the new stores were in markets we already had at least one store in. From there we spread our reach into Michigan and down into the Carolinas—our first store in the South. We were apprehensive about it. We’d always been a cold-climate store.
But our first store there, in Raleigh, was a hit beyond our wildest expectations, partly because we visited it regularly after it opened. The heavy outerwear that was our staple in New York and the Great Lakes states was overkill in the Carolinas—that we knew before we left Pittsburgh. But what we learned from our store managers down there was more nuanced: we were pulling baseball and softball gear from the stores too early each fall, and waiting too far into the spring to return it. “Guys,” one manager told us, “we can sell baseball stuff in January.”
All of the new stores were tremendous successes. We were back to making a profit, and in short order we were able to retire a big piece of our debt. Denis Defforey, God bless him, was wonderfully paternal through our return to health. One day we were talking and he asked, “Are you sure you’re okay from a capital standpoint?” I told him I thought we were in good shape. “Okay,” he said. “Just be sure. You don’t want to get into trouble again.” When he left, Mike Hines chuckled and shook his head. “Don’t you feel like you just had your grandfather ask you, ‘Are you sure you have enough spending money?’ ”
I was confident we had enough. For twenty years now I’ve been fixated on avoiding debt whenever possible. Twice, Dick’s has teetered at the precipice because we were beholden to banks—the first time in 1987, when our Binghamton lender abruptly tossed us overboard through no fault of our own, and again in 1995, when we were reckless and stupid. I do not want to find us in that situation again.
I now understand the scar tissue my dad carried after Hillcrest. You never get over a close call like the one we experienced in the mid-1990s. I will never again be comfortable relying on someone else’s capital. I will always be a little paranoid and insist that we finance all we do from our own earnings. It seems to me that it’s the only way to control your own destiny. The banks can’t take away your business if you don’t owe them any money.
So we carry no long-term debt. Self-reliance requires discipline, but we’ve managed it. I think that’s one reason we’ve survived when so many other retailers have run into trouble, especially our direct competitors in sporting goods. Many have carried a heavy load of debt, pushed on them by their private-equity-firm owners—firms that used these stores, and that debt, to pay themselves. When you’re leveraged up like that and have significant interest payments to make, you’re not as nimble when things get turbulent.
Wall Street gets on my back sometimes, saying we don’t have an “optimal balance sheet,” which is its way of saying we have too much cash and don’t have what the Street considers the proper amount of debt. Let ’em say what they will. Our balance sheet is optimal for us.
CHAPTER 12 “YOU’VE DONE ALL YOU CAN DO”
I am grateful, in some respects, that my dad did not know that we’d had such a close brush with death. The news might have brought to life all of his worst fears about the course I’d chosen for the company he started. I can only imagine that he’d have lost a lot of sleep over it, and I can’t even imagine what our phone conversations would have been like. Actually, maybe I can imagine. I’m glad they didn’t happen.
I’m even more thankful that he did not learn that I’d lost control of the family business. Dick’s was nearly fifty years old when that happened. Seeing it in the hands of outsiders would have broken his heart. That I’d lost it would have disgusted and infuriated him. He might not have even bothered to call.
But my gratitude is pure selfishness. The reason he was spared the news, and I was spared his reaction, was far worse than any of that.
As he entered his midsixties, my dad had been smoking nonstop for fifty years or better, and he’d been a drinker for nearly as long. It was probably inevitable that his bad habits would catch up with him. He’d already had a couple brushes with death. I dreaded the day I’d get the call that he was gone.
In the early 1990s, long before we moved to Pittsburgh, there came times when my father would suddenly be gripped by a terrible headache. It came on fast and usually passed in a minute or two, but for the duration he’d feel dizzy and see double, or be so staggered by the pain that he’d stop talking midsentence and have to sit down. We later learned that he was having transient ischemic attacks, or ministrokes. My siblings witnessed them, too. None of us realized how dangerous they were. And he had a lot of them.
I noticed about a year after these attacks started that he was becoming forgetful. He’d tell me something, then repeat the same remark or story a few minutes later. That’s when I remember feeling a first real twinge of worry. Even so, he was holding it together physically. He played golf several days a week. On the course he could still hit the ball pretty far and still had a great short game. Considering how long he’d abused himself, he was a medical miracle.
But then, on Easter weekend in 1995, Denise and I were in Florida with the kids. It was a trip we took every year, and my dad and I always played golf at Old Trail, a course affiliated with Jonathan’s Landing, near Jupiter, where he lived. We hit some practice balls before teeing off, then climbed into the cart, my dad behind the wheel. He drove us ten or fifteen feet, then stopped and looked at me with an expression of absolute horror. “Eddie,” he said, “I don’t remember how to get to the first tee.”
A wave of alarm bordering on nausea swept over me. He’d played Old Trail hundreds of times. It was clear that my dad had a real problem. We were in trouble.
I wondered what our next steps would be, where this was headed. His confusion passed and we actually played the round. I shot about a million that day.
Other episodes followed. While my dad was making his summertime visit to Binghamton the following year, my brother Marty spotted his car pulled onto the shoulder of Route 17, a major highway through town. When Marty stopped, my dad, obviously scared, told him that he couldn’t remember how to get home.
The frequency of these lapses increased, and between them my dad would plunge into depression. Dementia is a cruel disease, and in his case it was all the more so because he saw it was happening. Soon enough, he didn’t recognize his friends, and eventually, his own family.
At times it seemed impossible to believe that his slide was real. I was sitting with him at his apartment in Binghamton one day while he ate a cream-filled chocolate cupcake. He ate it like a baby, drooling chocolate from the corner of his mouth, making a mess of himself, and I was suddenly sure that he was putting me on, that he was busting us. There was no way this was the Dick Stack I knew—not the man who’d been so formidable for so long. Any second, he’d wipe his mouth, look over at me, and say with a smile, “Had you finky kids going, didn’t I?”
But of course, that did not happen, and that scene became just one in a series of heartbreaks that went on for years. My stepmom, Donna, was heroic through all of it. She never left his side. She never complained. As she’d later put it, if love could have saved him, he’d have been saved.
My dad’s deterioration stole his ability to golf and fish, his great joys. While that happened, my oldest son, Michael, became obsessed with golf. One evening in March 1998, I suggested we play together the next day, when I knew he was off from school. “You have tomorrow off, and I’ll take tomorrow off,” I said. “Let’s play.”
