The fourth-largest U.S. sporting goods chain is headed for bankruptcy, a reversal of fortune analysts blame on Sports Authority’s staggering debt and the retailer’s failure to adapt to changing consumer tastes.
The Englewood-based retailer is nearing the end of a 30-day grace period on a $21 million interest payment it skipped in January. Failure to pay by Valentine’s Day would trigger a default on its $343 million of subordinated debt.
Sports Authority leadership has already begun negotiations with lenders on a deal to reorganize through Chapter 11 bankruptcy, Bloomberg reported earlier this month. That could result in the closure of as many as 200 of its more than 450 stores nationwide.
But closing stores and shedding debt in bankruptcy won’t help Sports Authority if the retailer doesn’t also reinvent its sales and merchandising strategies, analysts including Longmont retail and marketing consultant Jon Schallert said.
“If they do go into bankruptcy and if they do close stores, what they’ll blame it on is underperforming stores,” Schallert said. “In reality, it’s not underperforming stores. It’s stores that no longer meet the needs of demanding consumers.”
“Reinvention is a really hard thing,” he said. “It means a large organization like Sports Authority really stepping back and blowing up their business model.”
Sports Authority and its owner, Leonard Green & Partners, declined to comment for this story.
Given the broader push for healthier living activities, Sports Authority has a solid stable of products and good potential, but its performance is too uneven and the company’s debt to equity too high, said Michael M. Zuccaro, assistant vice president and analyst at Moody’s Investors Service.
“You’ve got to get the store experience, the online experience, everything needs to be working together,” he said. “The execution of these things has been inconsistent.”
Sports Authority’s knack for deep discounting to clear inventory also cuts into margins, while the high debt load sucks up cash and growing e-commerce sales ripple into higher shipping and fulfillment costs, Zuccaro said.
Although the company has drawn a sizable amount from its $650 million revolving credit fund, it remains cash-strapped, Zuccaro said. Sports Authority’s cash flow was $87 million in the red in 2015. The principal of its debts — and any unpaid interest — starts coming due in May 2017.
Sports Authority carries one of the lowest speculative credit ratings from Moody’s, which downgraded the company to Caa3 after the missed interest payment.
“The debt structure is unsustainable,” Zuccaro said.
About 100 Sports Authority employees were laid off in late January, mostly from the company’s corporate headquarters in Englewood, as part of a “balance sheet restructuring” aimed at reducing the debt load.
Englewood-based Gart Sports merged with Florida-based The Sports Authority in 2003, combining the two publicly traded companies under Sports Authority’s flag.
Three years later, Sports Authority was bought by a group led by private equity firm Leonard Green & Partners LP for $1.3 billion and taken private.
In the decade since, though, the company has struggled to keep up with rivals such as Dick’s Sporting Goods as well as Lululemon, Athleta and Amazon, according to Bloomberg.
In 2014, Sports Authority ranked fourth in revenue among U.S. sporting goods chains — despite having more stores than all but Dick’s, according to Statista, a statistics company with offices in New York, Germany and the U.K.
Dick’s, with 603 stores nationwide, led the pack with $6.5 billion in revenue, followed by Academy Sports, a Texas-based retailer with 190 stores, at $4.1 billion; and Bass Pro Shops, with 91 stores, at $4 billion.
Sports Authority had 470 stores and posted $3.4 billion in 2014 revenue, according to Statista. According to a Moody’s research note, Sports Authority reported more than $2.6 billion in revenue for the 12-month period that ended in October.
In 2011, Sports Authority signed a $60 million naming rights deal for the Denver Broncos’ home stadium. The next payment, due Aug. 1., is $3.6 million.
While Sports Authority’s commitment to its hometown is great, the retailer’s in-store experience doesn’t always score high with customers, Schallert said.
“When’s the last time you walked into a Sports Authority store and felt like the employee treated you like (they were) an owner? That just doesn’t happen,” he said. “You’re going to get someone who will ring you up and show you to the right aisle.”
Today’s shopper wants an experience, a destination, something more than they can get shopping online in their pajamas, he said.
“They are product generalists rather than product specialists,” he said. “So many consumers these days who are into sports and outdoor activities really want specialized products. Just like Macy’s and other generalized big-box stores, they’ve found themselves in trouble.”
The company’s longtime strategy of achieving market dominance through having more stores than any of their competitors isn’t sustainable, either, said Mary Beth Jenkins, president of The Laramie Co., a Denver commercial real estate brokerage.
“With the advent of the Internet and the fact that you can buy almost anything on Amazon, for any retailer to survive in brick and mortar, more stores isn’t the key,” Jenkins said. “The key is providing impeccable service, convenience and unique products.”
By going through bankruptcy, Sports Authority would be able to streamline and shutter unproductive stores — without triggering “go dark” lease clauses that could leave them on the hook for rent even after stores are closed for good, she said.
“It’s really a matter of the number of stores Sports Authority has,” Jenkins said. “I still think they’re a solid company with a solid brand name.”
Deciding which stores to keep and which ones to close is typically among the first orders of business in any retail Chapter 11 bankruptcy, said Donald Allen, a Denver bankruptcy attorney and certified business bankruptcy specialist at Markus Williams Young & Zimmermann. Through that provision, the debtor can reject any non-residential real estate lease they find “burdensome,” freeing them from any further financial obligation on the property.
Companies have 120 days from the date of their original bankruptcy filing to identify which leases they want to reject, although typically they will ask for an extension, he said.
“If a debtor decides a lease is burdensome and tells the court it’s burdensome, generally they are going to be allowed to reject,” he said.
Landlords are considered unsecured creditors, he said.
Filing for reorganization is “the most tortuous, painful, draining process a CEO or executive can go through,” said eBags CEO Mike Edwards, who was president of Borders Group when the now-defunct bookseller fell into bankruptcy.
“With Borders, I didn’t really have a choice,” Edwards said. “It was the only option — to take one last stab at saving the company.”
Once the Chapter 11 petition is filed, the clock starts and executives are under the gun to cut costs and come up with a plan that could satisfy creditors.
“The focus changes from running the business to surviving,” he said.
Edwards knew Borders had too many stores and that they were too large, so his solution was to shrink the stores and develop strategies to compete online and create new revenue streams outside the core category of books.
However, it was hard to win the confidence of investors and creditors amid a digital revolution and rising skepticism about the future of bookstores, he said.
Borders started Chapter 11 in February 2011 and liquidated five months later.
“It’s kind of like flying a 747 and you know you’re running out of fuel,” Edwards said. “You’re throwing out seats and baggage just to try to find a safe place to land. But you also can sit back and say, ‘Wow, look at how much waste was in this company.’ “
Sports Authority’s biggest demon is its debt. Whether the banks will be willing to work with the company remains to be seen, Edwards said.
If the company does enter bankruptcy, Edwards expects Sports Authority to shed a tremendous amount of costs, including people, service agreements and stores.
The most effective way for Sports Authority to overhaul its business could be under the protection of Chapter 11, he said.
“It really gives you free governance to manage change and augment any contract you have,” Edwards said.
Emilie Rusch: 303-954-2457, erusch@denverpost.com or @emilierusch
