JD Sports Fashion has announced the acquisition of Shoe Palace, which describes itself as “one of the most trusted athletic footwear and apparel retail chains in the United States,” and other assets in a cash and stock deal worth over $680 million in total. Acting through a wholly-owned holding company in the U.S., Genesis Holdings, JD is taking over 100 percent of the shares in the Shoe Palace Corporation from the founding Mersho family along with its interests in Nice Kicks., a website that offers special releases by major athletic footwear brands including Nike, Adidas and New Balance.
Based in San Jose, California, Shoe Palace was established in 1993 by the Mersho family and currently has 167 stores, the vast majority of which trade under the Shoe Palace banner. More than half of the stores are located in California, but the company also has a retail presence in Texas, Nevada, Arizona, Florida, Colorado, New Mexico and Hawaii as well as an e-commerce platform. In 2019, Shoe Palace generated revenues of $435 million and a pre-tax profit of $52 million, indicating that the deal carries a multiple of 13 times profits.
JD Sports said that Shoe Palace complements its two existing U.S. chains, The Finish Line and JD, which generated sales of £834.3 million ($1,120m) in the first half ended Aug. 1. In particular, the acquisition will significantly increase the group’s presence on the West Coast and strengthen its connection with the Hispanic and Latino consumers, who represent a significant proportion of Shoe Palace’s customer base.
The growing U.K.-based retailer is paying $325 million in cash for the acquisition, of which $100 million has been deferred and will be paid on various dates over the next 12 months. The outlay is being funded from its own cash resources and existing bank facilities. In addition, the four Mersho brothers who own the business have been issued equity in Genesis, leading them to own 20 percent of the enlarged group in the U.S. The initial fair value of the equity consideration is approximately $356 million, says JD, indicating that its entire retail properties in the U.S. are now valued at nearly €1.8 billion.
The Mersho brothers will have the right, through put and call options, to sell down their stake from Feb. 1, 2025. They will continue to manage the Shoe Palace business although the intention is that, from next year, JD Sports’ and Shoe Palace’s teams will begin to share ideas and best practices.
It is not sure at this stage whether some of the Shoe Palace locations may be converted into JD shops like with The Finish Line, which became part of the group through a merger agreement in March 2018. In any case, the new acquisition will strengthen JD Sports’ already strong bargaining power with the major sports brands including Nike. There is speculation that the Swoosh would have cut off Shoe Palace, in the absence of JD’s intervention, based on its policy of working with fewer retail clients.
Analysts at Shore Capital said the deal seems like ”another sensible bolt-on acquisition that will be earnings accretive from year one.” “This acquisition looks right up (JD Sports’) street in core footwear and is complementary to its existing U.S. business in terms of geography and extends its reach in terms of customers,” they added, noting that the takeover will no doubt provide opportunities synergies in buying and central overheads.
