by Ed Stack
Besides, I knew the venture group wanted to pull its remaining stake out of Dick’s—it remained eager to put its money to use elsewhere—and I wanted to help it do that. Going public would be the easiest way to achieve multiple goals at once.
So in the spring after the attacks, we planned another run at an IPO. Dave Fuente had taken Office Depot public back in 1988, and in several conversations he tried to prepare me for what lay ahead. Mike Hines and I would be embarking on a “road show” to introduce the company to potential investors, he explained. We’d go from city to city, meeting with the people who ran mutual funds, big pension funds, investment houses, and we’d have to keep at it for weeks. “You’re going to hate it,” he promised. “It’s an absolutely grueling process. By the time you finish you’ll be exhausted and sick, and you and Mike will be ready to kill each other.”
I told Mike what Dave had said, and we resolved that our experience would be different. This was probably the only time in our lives that we’d do this, and we’d make sure that we not only did it right but had a good time. We were ready to file our S-1 with the SEC in early July, but we held off doing so until July 17. It was my dad’s birthday. Call me superstitious, but I thought he might be able to help.
* * *
We hit the road for nearly three weeks that fall, and as Dave had warned, it was exhausting. We were on the run from dawn to close to midnight every day, flying from one place to the next, making a pitch to every group we met. Each put us through the wringer, trying to determine whether we were winners or losers. At day’s end we’d be utterly spent.
But for all that, we had a great time, too, in part because we met some real characters along the way. I can’t remember the group they represented, but in Kansas City a couple of guys played good cop, bad cop with us. The good cop would quiz me about our strategy, our business philosophy, our expectations. The bad cop just fixed on me with an icy stare. It was so overt that it was all I could do to keep from laughing. At one point I looked over at Mike and nearly lost it, because he was staring back at the guy with the same expression; if he could have taken him outside to kick his ass, I think he would have. As we walked out of their office, we had a good laugh about those assholes.
But the trip brought bad news with the good, and in ways that Dave hadn’t predicted. In October 2002, the interest in any IPO was lukewarm at best, and the market for retail was downright cold. No one had tried to take a major retailer public in months, and few of the people we talked to seemed excited by our story.
Moreover, our stock price would be based on comparables, just as real estate agents set house values. The market would look at the already-existing stocks of companies in the same business, and in most cases price the newcomer about 10 percent lower. If we were as good as we believed ourselves to be, we’d see our price rise after our debut, but our initial price would largely be a product of how well, or poorly, others were doing. And the obvious comparable for us, The Sports Authority, wasn’t doing well. Its stock was drifting downward, and taking us with it.
Before we embarked on this road show, our investment banker had told us we could expect to price at $18 to $20 a share. As our comparables continued to flounder, he revised that number to $16 to $18. And we were riding with him in Los Angeles, more than two weeks into this backbreaking tour, when he informed us that we no longer had a shot at even that range. “Sports Authority is taking a real hit,” he said. “We’re probably going to be in the thirteen-to-fifteen-dollar range.”
We were pulling up outside an LA office building, where we were about to undergo another hour or two of close examination, and his announcement pissed me off. I glanced over to Mike. We’d been working together for seven years and had become good at wordlessly reading each other. I could see that he was disappointed, but his expression told me he was thinking the same thing I was: the ground had shifted under our feet. Everything we’d been told, all that had made this IPO seem a smart financial move, had changed. “We’re done,” I told the banker. “We’re getting our brains beat out from a stock-price standpoint. We’re not going to do this right now.”
He took that in for a moment. “We can call off the IPO, no problem,” he said. “But we have this next meeting in fifteen minutes, and it’d be poor manners to cancel it.” It was a good point, because sooner or later we might be back at this. We agreed to do the meeting and gave our presentation to yet another group of skeptical investors.
When it ended, we stepped back out into a cloudless Southern California afternoon. Mike had already called his wife to say we were headed home. Our banker seemed resigned to the idea that the IPO was off. But something gnawed at me. In place of the relief I should have felt at a decision made for a good reason, I felt only uncertainty. We were about to climb back into our SUV and set off for the airport when I told them that I needed to take a walk.
I set off through town, trying to examine the situation from every angle. The new price range was lousy, no question—we’d raise a lot less money than we’d expected. And there was always a worst-case possibility to consider: that after opening at $13 a share, our stock could slump below the opening price—a kiss of death for a new offering, one from which few recovered. Then there was my long-standing preference to stay private. On the other hand, we might never get this chance again. We might never have another shot at strengthening our balance sheet against unforeseen trouble. The environment was becoming ever more hostile to retail IPOs. The window might be closing for a very long time.
And a thought came to me, in my father’s voice—a memory decades old, from an exchange otherwise forgotten—delivered in his signature tough-guy style: “If you start something, you finish it. End of conversation.” I might have just as easily conjured another voice, my gramp’s: “If you tee off on number one, you putt out on eighteen.”
I was four blocks into my walk. We could minimize the effects of the lower stock price by limiting the size of the offering—we’d put less of the company’s stock up for sale, so that no matter how it fared, it would affect us only so much. And if the stock took off, we could do a secondary offering and get the higher price we deserved.
My anxiety lifted. Resolute calm replaced it. We’d make it work. I returned to the parking lot, where Mike and the banker were waiting beside our SUV. “We’re going to finish what we started,” I told them. “Let’s go to the next meeting.”
* * *
Many IPOs see a company’s management team take chips off the table: the influx of outside money enables them to cash out part of their stake in their company and thus put a few dollars in their pockets. Some other managers sit tight, hang on to their shares, and if things go well, wind up owning a piece of a more valuable company down the road.
I thought I could stress to Wall Street just how committed I was to Dick’s and our IPO by doing neither of these things. Instead, I’d buy into the IPO—I’d use our public offering to buy more stock in a company I already controlled. Doing that is pretty much unheard-of. When I unveiled this idea at our next meeting in LA, the guy we were pitching leaned forward in his chair, amazed. Others we talked with at later meetings were shocked, too. By the time we wrapped up our road show, I could tell our audiences that I wasn’t alone: Mike Hines and Bill Colombo were buying in, too. I’m convinced that caught the attention of investors who might have otherwise given us a pass.
As our preparations fell into place, Mike Hines and I jumped on a plane for Geneva. Denis Defforey, who’d saved us from a hostile takeover and at every turn proved himself a caring and generous shareholder, as well as a terrific human being, was so ill he’d given up his board seat and was no longer up to traveling to Pittsburgh. We wanted to thank him for all he’d done, though, so we went to him.
We met him at his flat, and he looked terrific—really, if I hadn’t known he was ailing, I would have never guessed it. We sat and talked. I thanked him for his friendship and told him how much he’d meant to the company. “If it hadn’t been for y
ou,” I said, “none of this would have happened.” I explained that we were taking the company public and mentioned what had happened with the stock price on our road show.
He shook his head. When he had put together Carrefour’s IPO years before, he “didn’t get the thing public at the price [they] wanted,” he said. “But if you have a low price, it’s easier to go up, and everyone will always be happy about that. So don’t worry about the price.” We went to lunch at a nearby restaurant. Denis still owned a pile of Dick’s stock. He looked over at his nephew, who was also his financial adviser. “As long as I’m alive,” he told him, “I never want you to sell a single share of our Dick’s Sporting Goods investment.”
That meant a lot to me. And it’s my understanding that he was good for it. Denis’s paternal feelings for the companies he invested in really showed in his relationship with Dick’s. We were one of the lucky companies he nurtured. He was a class act.
Back in New York, we met with an investor from a hedge fund who announced he wanted to buy 25 percent of the IPO. We’d never have allowed someone to buy that big a cut of the company, but it was a great endorsement. A few days later, on the evening before we were to go public, we were in the office of our financial adviser, Ken Berliner. Our main investment bankers were Goldman Sachs, Merrill Lynch, Thomas Weisel Partners, and William Blair & Company. We’d already worked with them to reduce the size of the offering. Now they were reading the mood on Wall Street and advising us on the price we should set for our stock. It was the moment of truth.
Months before, when we’d talked about the road show, Dave Fuente had shared another piece of hard-earned wisdom with me. “You have to understand that your investment banker is not your friend,” he’d said. “He’s doing this one deal with you. He’ll be trying to sell Dick’s to the likes of Fidelity and Janus and other funds. That’s going to be the extent of your interaction. But afterward, he’s going to keep working with Fidelity and Janus on other deals. So, remember: your investment banker is not your friend.”
His words had come to mind briefly back in Los Angeles, when our banker told us that we were likely to sell for $13 to $15 a share. Now, in Ken Berliner’s office, the investment bankers reported what they were hearing. “Look, this is a tough deal to get done,” they told us. “We think the right price is twelve dollars a share.” This, after I’d nearly killed the deal at $13.
“We may be able to get twelve fifty,” they said, “but we wouldn’t recommend that. We don’t think it’ll trade well in the after-market. And at thirteen dollars, there’s no deal. You can’t get the deal done.”
Mike, Bill, and I huddled. We called Fuente. We weren’t selling that much, which took some of the sting out of the news. And our venture capital partners would be leaving us, at long last, which argued for proceeding. We had to make a decision then and there, and the four of us agreed that we’d do the IPO at $12 a share. I had previously committed to buying eighty thousand shares.
Our families were waiting at a restaurant across town, and we climbed into a car with our Merrill Lynch bankers and set off to join them at a dinner celebrating the day’s work. On the way over, I got a call. It was a woman from the Merrill Lynch trading desk. “We understand you have interest in buying eighty thousand shares of Dick’s Sporting Goods stock,” she said. “I am happy to tell you that you are going to be allowed to participate in the IPO.”
She had no idea she was speaking to the Dick’s CEO. “But,” she said, “the deal is so oversubscribed that we have to cut you back. We can’t sell you eighty thousand shares. We need to cut you back by ten percent. You have been allocated seventy-two thousand shares at twelve dollars each.” I repeated out loud, for the benefit of those in the car, “I can’t buy the amount I want. You’re going to cut me back by ten percent?” One of the bankers from Merrill Lynch was sitting next to me. He and our other investment bankers had lowballed us. They’d set an unnecessarily low price for our stock at the last minute.
“Would you still like to participate?” the caller asked.
“Yes,” I said. “I will.”
As soon as the call ended I turned to the banker. “You’ve got to be kidding me,” I said. “You stood up there and told us the deal had to be done at twelve dollars, that we couldn’t do a deal at thirteen dollars—and now I get a call from your trading desk saying you have to cut me back because it’s so oversubscribed?” I was not happy. Not because I’d been cut back—I already owned plenty of Dick’s stock—but because people who’d long been involved with the company had cashed out some of their investment, and their payout had been whacked by fifty cents a share, a buck a share, $1.50, whatever it should have been. For no reason I could think of. “Dave Fuente told me that your investment banker is not your friend,” I told the banker. “Now I know exactly what he meant.”
The banker didn’t have a response. The rest of the ride was very quiet. At dinner, I sat next to Ken Berliner and my family. I didn’t have much to say to the investment bankers.
* * *
Morning brought a surreal trip to the New York Stock Exchange to ring the opening bell. I’d spent eighteen years running the company, and most days it didn’t seem much different from when we had two stores. Of course, I understood that, in an objective sense, the company bore very little resemblance to the Dick’s of 1984, but its place in my head and heart hadn’t shifted much as it grew. It had always been, for me, a mission—no less when we were at 345 Court Street than when we’d opened our hundredth store.
It was something like the experience I’d had as a parent: my kids grew up, but they stayed my kids. When I stopped to think about it, I recognized that they’d changed over the years, but in my heart each was a bundle of all the stages they’d passed through—an infant in my arms, a toddler, a fifth grader, a teenager—and that bundle was indivisible, bound by the constancy of my love for them.
That morning on Wall Street, I realized that Dick’s was about to undergo a big change. But it was almost an out-of-body experience, to be up on that podium with our entire management team and to push the button that rang the bell that opened the session. Afterward we took a tour of the exchange, had breakfast, then flew home. And, of course, we checked our stock price through the afternoon.
Our shares opened at $12.25 and closed at $13.15, or nearly 10 percent over our offering price. By late November, the stock was trading for more than $20 a share.
Did things change much after we became a public company? Only in the sense that now, everything we did was open to public scrutiny. Everyone knew who we were. That contrasted sharply with an experience I’d had ten years before our IPO, when we won an award at the National Sporting Goods Association. When the emcee announced it, he said, “This goes to Dick’s Sporting Goods. Ed Stack, please come up.” Two guys were sitting at the next table, and one said, “Who are they? Never heard of them.” I thought that was wonderful because we strove to fly below the radar. We believed it was key to our survival. Now our financial statements were everyone’s business. Our good days and bad were newsworthy, when before, both had passed unnoticed. That took some getting used to.
But otherwise, life at Dick’s changed very little. We were, and are, a controlled company. We have two classes of stock. Our Series B shares, held by me and my family and not traded, get ten votes for every share. The Series A shares, traded on the market, get one vote per share. We control well over 60 percent of the votes, and thus the company. We built that structure into the IPO, because it enables us to do what’s right for the business over the long term, rather than worry about how things are going from one quarter to the next.
Don’t get me wrong: We care about quarterly results. We want to deliver the best possible return on investment for our shareholders. But we’re not going to mortgage our future for the sake of one quarter. If we hadn’t received the ten-to-one vote differential, we wouldn’t have gone public because I know we wouldn’t have been allowed, over time, to keep our focus on the horizon.
Another change that came in 2002 was easy to make. In 1999, Bill Colombo had come back to Dick’s after leading our Internet company, and I’d talked with him several times about stepping into our presidency. He was unparalleled in his ability to execute our strategy and a creative genius in running stores. I thought he’d be great in the job. Bill wasn’t so sure he was up for it.
Late in 1999, Bill had gone to the executive MBA program at Harvard Business School. He found it really useful and would later say it changed him as a businessman. When he returned the following year, he and I had gone out to dinner, and I’d asked him: “So, what do you want to do next?” Bill had answered, “I want to be president of the company.”
I was thrilled to hear him say that. In 2002, we made it happen. Bill became Dick’s president and took a seat on the board.
* * *
We got back to work, resolved that we’d never fail to meet the Street’s expectations for our performance. I was especially fixated on making our numbers the first several quarters after going public. So many sporting goods companies before us had cratered at that juncture. The world didn’t need another.
It so happened, however, that the fall after our IPO was a warm one, and third-quarter sales at so many of our stores depended on cold weather. Business wasn’t great. Little more than two weeks before the end of the quarter our controller walked into my office to announce, “I don’t think we’re going to make our numbers.”
I was beside myself. We were about to be exposed to the world as total idiots. Then, the last week before quarter’s end, it got really cold across the country, and we sold a ton of Under Armour and outerwear. I mean, piles of it. And we made our numbers. That was too close for comfort, and we’ve taken great pains to ensure we’ve calculated all the variables that can affect earnings. In sixty-plus quarters, we’ve fallen short of our guidance only a few times.
