It's How We Play the Game

by Ed Stack

  We met at one of the restaurants at the Aviara Resort, a five-star Four Seasons hotel, spa, and golf resort in Carlsbad with an Arnold Palmer–designed eighteen-hole course. It was just an amazing place, and it was clear that Parker was in his element there. He came across as king of the mountain. Once seated at a table, he and I exchanged pleasantries for a few minutes before he reiterated that Callaway wanted to open us up. But before we do, he said, I have to ask you a question. Who were you bootlegging the product from?

  “Bruce,” I said, “I can’t tell you that.”

  “Well, if you don’t tell me,” he shot back, “we won’t open you up.”

  “Bruce, I’m not going to tell you,” I said. “I don’t think it’s our job to police your brand, and I’m not going to tell you.”

  I could see he was getting angry. “If you don’t tell me,” he said again, “we won’t open you up.” It was pretty clear to me by now that getting the names of the people selling us product was the real reason I was there. I doubted he ever planned to bring us aboard.

  I looked him in the eye. “Bruce, my mother taught me two things, growing up. Number one, you go to church on Sunday. And number two, you don’t rat on your friends. I’m not going to tell you.”

  Bruce said it was a shame that we wouldn’t be doing business.

  I said that I guessed the meeting was over.

  I guess it is, he agreed.

  I stood, thanked him for his time, and left. I’d been there all of fifteen minutes. Back at the airport, I had to wait until eleven that night to catch a red-eye flight back to Pittsburgh. It gave me time to determine our next move. Once I got home, we organized a Christmas campaign in which we sold Callaway at deep discounts. We advertised these low prices throughout the holidays. It drove Parker and Callaway nuts.

  How do I know that? The following month, I was at the annual PGA Merchandise Show—the golf industry’s biggest event, attended by fifty thousand pros, manufacturers, and retailers—and I passed the Callaway booth. Bruce Parker was standing inside and started yelling at me, “You can’t hurt me! You can’t hurt me, you son of a bitch!”

  Well, now, I thought, I think I should go over and have a conversation.

  He kept hollering, and in the process ignited my temper. I’m embarrassed to say the exchange grew so heated that it came close to turning physical. I’ve got some Dick Stack DNA in me, you know.

  (Quick aside: My dad was at a golf course once, playing craps in the clubhouse with a bunch of other guys. This one character, a head taller than my dad and about fifty pounds heavier, lost big but refused to pay up. “No problem,” my dad said. “But you’re not playing anymore.” Apparently, this guy had had an issue with my uncle Ed, who at the time was fighting for his life in the VA hospital, and he sneered, “I never met a Stack who was any good.” My dad asked him to step outside. As soon as they were through the door, my dad punched him in the face, rode him to the ground, stuck his knee between the guy’s shoulders, and mashed his face into a gravel parking lot. So.)

  To shorten an already-long story, I got pretty hot. We were never closer than five or six feet from each other, but that’s because we were both restrained by colleagues. A bunch of Callaway people clamped onto Parker, and Jay Mininger and another Dick’s associate had a hold on me.

  After that, I had to resign myself to not doing business with Callaway. A couple of years passed. We’d emerged from our near-death experience and were back to growing fast, and we were selling a brand of putters called Odyssey—we were their biggest customer—when we read in the Wall Street Journal that Odyssey had just been bought by Callaway. Well, so much for Odyssey, we said among ourselves. We’d surely have our top putter taken from us, because Bruce Parker and I weren’t exchanging Christmas cards.

  But Parker surprised me with a call. “I’d like you to come out,” he said. “I’d like to clear the air, and we’d like to open you up.”

  “Bruce, we tried that once before,” I said. “And as you’ll recall, it didn’t go well.”

  “It’s not going to go that way this time,” he said. “We’ve looked at your sales with Odyssey, and you’re not only their biggest customer, they say you’re their best. They love doing business with you guys. Come on out, and I promise we’ll open you.”

  I said okay, and again flew to San Diego, this time with our golf team, and we made a deal. While I was at their Carlsbad headquarters, I met with Ely Callaway, who by then had a bigger-than-life reputation. He’d been a success at everything he’d ever done, and he’d been doing it since World War II. I was escorted into his office.

  We made small talk for a while. Then he looked at me with an impish grin. “We make the most expensive clubs in the world,” he said. “Do you know why?”

  It was a weird question, and I remember thinking, Stack, don’t say something stupid. You’re finally on the verge of getting Callaway to sell to the company. Don’t screw it up. I went with the most innocuous answer I could think of: “No. Why?”

  “Because we can!” he said. He cackled.

  So began our relationship with Callaway Golf. We’re now their biggest account, by a significant margin, and among all the companies that we do business with, Callaway is one of my favorites.

  * * *

  Though we now had quite a few outside investors in the company, my primary contacts with the venture capital group remained Jerry Gallagher and Michael Barach. And it was as our success was becoming apparent that they began to second-guess what we were doing. Now, as I’ve said before, to succeed for any sustained period in retail you can never allow yourself to relax. You have to constantly question your assumptions, rethink your approaches, reimagine your stores and your product lines. So a certain amount of second-guessing is not only helpful, it’s necessary.

  This wasn’t that kind of second-guessing. Barach was a believer in modeling—using economic models to dictate what the business should be doing. One of the key measures his modeling used was GMROI—gross margin return on investment—in which you divide your gross margin on the sales you make by the cost of your inventory. Stripped to its essentials, it reveals whether you’re making money on the stuff you sell.

  His figures showed that we sold some products that did very well by this measure, and others that didn’t. That wasn’t news to me. We knew that we made relatively little money from each firearm we sold, for instance—they cost us a lot to buy, and we couldn’t sell them for much of a markup. Next to apparel and footwear, where our margins were better and the inventory turned over faster, guns seemed like a dog.

  But to position ourselves as a full-line sporting goods retailer, we needed those categories in our stores. They gave us credibility and authenticity. In short, Dick’s had always aimed to go deep in its specialties, and we couldn’t well do that if we eliminated too much of the lower-margin products on our shelves. We weren’t as valuable to the customer, and we weren’t as special in the market, if we carried just the bestselling, lowest-common-denominator goods. We had to have a broad range of merchandise, including some arcane offerings, to win in the marketplace.

  Barach’s modeling said otherwise. At the time he was crunching his numbers, two big-box footwear retailers had burst onto the market. Just for Feet had started as a small shop outside Birmingham, Alabama, in 1977, but reimagined itself as a superstore ten years later. By the late 1990s, it was operating one hundred forty big, flashy stores throughout the South and Midwest—twenty-thousand-square-foot places that boasted indoor basketball courts, lots of video monitors and rock music, and thousands of shoes. Nike and other vendors had stores-within-stores in these places, and they made such a splash that by 1997, Just for Feet was the country’s second-largest retailer of athletic footwear, behind Foot Locker. Sneaker Stadium was a smaller but fast-growing chain of similar stores scattered between Connecticut and the Carolinas. Its giant outlets were little more than clones of Just for Feet, and every bit as intimidating.

  Barach watched them gr
ow and became convinced they were going to destroy us. Their GMROI was great—all they sold was shoes and some activewear made by the shoe brands. He tried to convince me we should stop opening sporting goods stores and focus all of our energy on footwear and apparel. “Michael,” I told him, “we’re not going to do that.”

  I like to think of myself as a student of retail, and it seemed to me that focusing so much on the GMROI was exactly what had gotten Herman’s in trouble. They had been the dominant player until their bean counters insisted that they do away with all their low-GMROI categories, including outdoors and fishing. With that, Herman’s became a glorified socks-and-jocks store, undistinguished in a crowded field of apparel and footwear retailers.

  I didn’t want that to happen to us. One of the enduring challenges of our business model is that there is no typical Dick’s customer. The shopper who walks into our store seeking athletic shoes is very different from someone looking to buy a new driver, or a football, or a rifle. In fact, we carry so many different styles of athletic shoe that just that one department serves a wide range of customers—runners, walkers, hikers, basketball players, aerobics practitioners, baseball and football players, boaters. You name it, we probably carry it. So every day we serve scores of different constituencies.

  What this means, in practical terms, is that we have to be very good in just about every form of team and individual sport out there, as well as a wide range of pursuits that aren’t sports, per se, but fall under the umbrella of outdoor recreation. This has become a lot more complex over the years. It’s difficult; it would be a lot easier to just go for the quick buck. But it’s what sets us apart, and no one on our team wanted to give that up. We wanted to stay as broad store-wide as we were, and as deep as we could get in each category. Some of what we sold would be high margin, and other stuff low, but we’d be Dick’s.

  Barach and some of our other outside investors were still pushing for change when Sneaker Stadium cratered, followed not long after by Just for Feet. In 1997, Fortune had ranked Just for Feet in sixth place among America’s fastest-growing companies; in November 1999, they filed for Chapter 11, done in by too much debt and out-of-control inventory. There but for the grace of God (and GE Capital) went Dick’s.

  * * *

  We were still embroiled in the GMROI debate when our venture capital partners tried to take us into the dot-com bubble. It’s hard to explain to those who weren’t around at the time just how crazily bullish American business was in the late nineties over the notion that the future of commerce lay in the Internet. The time might be coming when many bricks-and-mortar stores can no longer compete with online retailers, but that isn’t the case today, and it certainly wasn’t in the late 1990s.

  Twenty years ago, computers were not the essential household tools that they’ve since become, and many home systems weren’t even connected to the Internet. So right off the bat, the dot-com boom was premature, because the potential audience any dot-com business could reach was just a fraction of the population.

  That was just one of the challenges online companies faced. The Web was primitive and clunky, compared to its modern form. We tend to forget how recently our digital age has come to command our lives. Here’s a little something to consider: The first iPhone hit the market in—when? 1992? 1995? 1999?

  No. The answer is 2007. The iPad didn’t come along until 2010. Our lives have been transformed almost overnight. So the dot-com boom was reaching a fever pitch way too early, when computer operating speeds were glacial, online offerings were Stone Age, and the pleasure of online shopping was so-so, at best.

  Plus, Internet companies were expensive to get up and running because the one advantage they claimed over physical retail was convenience—the notion that you could find and buy a product without leaving your house—and key to that was speed. If it took them two weeks to deliver a product you could otherwise get in a drive across town, they weren’t competitive. They had to be fast.

  That translated into steep warehousing and shipping costs, which they couldn’t very well pass on to the customer, or they’d price themselves out of business. So from the start, online businesses faced market, technological, and logistical disadvantages that, it seemed to me, made them unattractive. I didn’t see how we at Dick’s could make money online—not then or any time soon. (Obviously, that would change in years to come.)

  None of this stopped investors from going hog wild for dot-coms. The values placed on some Internet companies were nothing short of Fantasyland. When eToys.com went public in 1999, for instance, its trading price opened at $20 a share; by the end of that first day, its value had almost quadrupled, to $76 a share, and the IPO raised $166 million. In the succeeding months, its stock climbed as high as $86 a share, and eToys had a higher valuation than Toys “R” Us, at the time the toy industry’s nine-hundred-pound gorilla.

  But eToys, like many Internet retailers, spent mountains of cash on marketing, trying to establish a place in the public mind, and on a pair of giant distribution centers. It failed to deliver many toys on time during the 1999 Christmas season, dealing itself a public-relations blow from which it never recovered. Losing millions of dollars a quarter and finding itself almost a quarter-billion dollars in debt, the company saw its stock price free-fall to nine cents a share. It was gone shortly thereafter.

  When the dot-com boom was at its height, however, some of our venture capital partners had caught the fever. Michael Barach pushed hard to get us into online sales—in fact, he argued we should stop opening stores and shift our focus to the Web. Lebow started K2, a company that sought to bankroll retailers hoping to get into e-commerce.

  On the Dick’s board, Dave Fuente and I were deeply suspicious of the craze and thought it would be stupid to jump in. But we were in the minority. So under pressure from our gung-ho venture capital partners, we spun off a separate company, DSports.com, that Bill Colombo ran for a while, under the heavy hand of Steve Lebow and Henry Nasella, a former president of Staples who was also involved in K2. We weren’t thrilled with the DSports name, by the way, but Dicks.com was already taken—it was a gay pornographic site. That made us all totally crazy. We repeatedly tried to buy it, but it was years before we succeeded.

  We and K2 each invested $10 million in our online program and launched it on Super Bowl Sunday in January 1999. It was a modern site for the time, with search buttons by category, brand, and price, and we soon had 34,000 items for sale there. Before long we were offering Nike, Adidas, The North Face, and other brands, with coupon offers that knocked our already-low prices down further, at significant cost to our margins. We spent a ton of money advertising on ESPN and Fox Sports.

  My aim in the experiment wasn’t to make money—I didn’t think we could do that. Rather, I just hoped to limit how much it cost us. I remember sitting with Lebow and Nasella one day, and Nasella saying to me, “You clearly don’t want to win in this, because you’re not willing to lose more money.” He was right about that. The eToys story, and dozens of other examples of high fliers gone bust, were cautionary tales that I thought we’d be fools to ignore.

  My lack of enthusiasm for turning Dick’s into an Internet-only business caused some heartburn among our investors. It came to a head when, right about then, I decided to take my first vacation in years. Denise and I flew off to Cabo San Lucas, Mexico. We were having a great time when I got a call from my assistant back in Pittsburgh. She thought that there might be a coup under way. We cut the vacation short, and once home I called Barach. His message to me was unequivocal: “You shouldn’t be CEO.”

  We agreed that he’d fly in from Boston to see me. His flight was due to land at six thirty p.m., but I didn’t want to waste time waiting for him when I could be working, so I told him to call me when he got to the hotel; we could get together at the Embassy Suites, which shared a parking lot with our offices, to talk. He called at seven fifteen p.m., livid: Where are you? You’re supposed to meet me!

  Michael, I’m at the o
ffice, like I said I’d be, I replied. You were supposed to call me when you were settled in. He started hollering that it was like Truman and MacArthur, insubordination and whatnot. I remember wondering what the hell he was talking about. In the days that followed, he tried to have me removed as CEO, but Denis Defforey, Fuente, and the rest of the board—even Gallagher, also a K2 investor, and as pro-Internet as he was—wouldn’t go along with him.

  * * *

  Our investors’ fire for the dot-com boom was unaffected, however. Gallagher, Barach, and others were desperate to get into it. One way to do that was to take Dick’s public, which would enable them to pull out all or part of the investments they had in us and put them to work in online companies. I wasn’t interested in going public. I’d have been content to stay a private company forever. But one upside to becoming a publicly traded company was that we’d be done with our venture capital partners. I wasn’t as eager to see them go as they were to leave, but they’d been wearing out their welcome, what with all the fuss they’d made over GMROI and the Internet.

  We drafted an S-1, which is a form you prepare in anticipation of offering shares to the public. It gives the Securities and Exchange Commission, as well as potential investors, a detailed look at a company’s balance sheet, its historical sales and earnings, and its assets. It also lists the possible risks of buying in and lays out the company’s plan for what it’ll do with the money it raises from the public.

  We learned very quickly that our timing was bad. For the past couple of years our profits had been good—very good. But we’d been driving sales with discounts and promotions that we didn’t think were sustainable in the long run—we were churning a lot of merchandise into and out of our stores, but our margins had fallen in the process. We’d addressed this by cutting back on the promotional nature of the business. Our sales had flattened, but our margins had increased, which was a healthier place to be. We were actually making more money.