Some Sports Retailers Are Not on Their Game

The past few months haven't been very good for sports retailers.

In this segment from the Industry Focus: Consumer Goods podcast, Sean O'Reilly and Vincent Shen talk about a few of the biggest players that have struggled in the changing retail landscape -- Sports Authority, City Sports, and Vestis Retail Group (operator of Eastern Mountain Sports, Bob's Stores, and Sports Chalet stores) -- and explain where each of the companies is looking to go.

The news is not good, and it's very possible some of these long-standing brands will end up disappearing.

A full transcript follows the video.

This podcast was recorded on April 19, 2016. 

Sean O'Reilly: So, Vince, digging in here to the world of sports retailing. We're touching on a subject I kind of noticed, just observing the retail world in the last 10 years. Sports retailers are not doing so hot.

Vincent Shen: Obviously, this is one niche of the broader retail space, especially if you're thinking leisure, with leisure wear, which is a big part of these businesses. But I just thought it was interesting, because it kind of reflects a lot of the challenges that a lot of retailers are having now. So we've heard a little bit about these struggling brands, and probably a lot of us are familiar with them. Think for a second about Sports Authority. Was previously the largest sports equipment chain. The product of many, many acquisitions.

It was taken private in a leveraged buyout deal. But, they filed for bankruptcy protection in March. They're closing about 140 of their 460 locations. And their current owner is private equity firm Leonard Green & Partners. So, they bought --

O'Reilly: They bought the thing in bankruptcy?

Shen: No, that's currently. They purchased Sports Authority for about $1.3 billion in 2006. Over time, they've accumulated about $1.1 billion of debt, usually a pretty common characteristic of these LBOs, and the company has struggled to operate under that kind of debt pressure. So, in January, they missed an interest payment. And since then, they've been pretty actively looking for, essentially, a white knight buyer to come in and save the company. And though management mentioned they've received a lot of high interest from buyers, nothing really came together. So they're in bankruptcy protection now.

Interestingly, for fiscal 2015, that ended Jan. 30, 2016, the company had revenue of about $2.6 billion, so still a pretty big business. Like I said, 460 locations. But it had before-tax losses of $156 million, according to The Wall Street Journal. And there's going to be a two-part auction.

On May 4, they have leases for over 100 of their closing stores going up for sale, and the remainder of the assets -- so, pretty much everything -- potentially go up for bidding about two weeks later, on May 16. There's been interest, obviously, from other competitors who are still going. So, think privately held Academy Sports + Outdoors, Dick's Sporting Goods (DKS -0.07%), Modell's, which is family owned, have all talked about getting involved in the bidding process. 

So, on the one hand, you have competitors who might purchase assets and keep stores open as a going concern. On the other hand, you have liquidation firms that might outbid them and just buy it out and liquidate all the assets. So it'll be interesting to see what's left of Sports Authority. It's still a big brand. I'd be surprised to see every single store close.

O'Reilly: Yeah, it's wild. What's the deal with City Sports?

Shen: City Sports is a smaller example. That actually happened about last October. They're based out of Boston. Again, just another example, smaller chain, filed for bankruptcy last year. They closed eight of their 26 locations, and investors ended up buying some of their intellectual property. So they're hoping to revive that chain.

But in very recent news -- this just happened yesterday -- we have Vestis Retail Group. So, again, yet another example of the dominoes falling at this point for this industry. They operate a lot of big chains most people will be familiar with -- Eastern Mountain Sports, Bob's Stores, Sports Chalet, which is out on the West Coast. They are run by Versa Capital Management, a private equity firm. They acquired each of these chains separately, and essentially put them under a single umbrella. So they specialize in turning around some of these distressed businesses.

So Vestis was formed in 2012, after buying out Eastern Mountain Sports and Bob's. They added Sports Chalet in 2014. But the thing is, Sports Chalet was already struggling significantly. They'd been in business for over half a century at this point, but they'd been scarred by a lot of losses, declining results in the last 12 months. They were public and, in their last 12 months as a public company, reported $343 million in revenue. Bottom line lost $9 million, or $0.64 per share. Another big thing you'll notice, their gross margins, for example, declined from about 30.5% in fiscal 2010 and 2011 to 26.7% by the time the company was acquired.

O'Reilly: And that, of course, implies they're having to cut prices in order to move products, which is never good.

Shen: Obviously, they were struggling with their operations. So Sports Chalet is done. Versa's hoping to maintain Bob's Stores and Eastern Mountain Sports. But Vestis CEO Mark Walsh -- and I wanted to mention this specifically -- cited online competition and warm winter weather as some of the drivers for the tough times that the different store --

O'Reilly: I don't buy that winter weather thing. [laughs]

Shen: That's a one-time thing. Going bigger picture, those are just some of the examples of the brands or chains that have fallen victim to this very competitive environment.