Sports Authority filed for Chapter 11 bankruptcy in Wilmington, Delaware, on Wednesday, as reported by multiple news sources. It’s a move that comes following weeks of rumors swirling around the retailer, which is owned by Los Angeles-based private equity firm Leonard Green & Partners.
It’s a remarkable turn of events for Sports Authority, a company that opted to avoid a dramatic restructuring process. The Wall Street Journal reports that Sports Authority plans to close up to 140 stores, nearly one-third of its total stores. The Los Angeles Times mentioned that a distribution center located in Chicago, Illinois, and a second in Denver, Colorado, are also expected to close.
So what went wrong here? News sources seem to center on three distinct but very crucial issues that led to Sport’s Authority’s bankruptcy issues.
First major problem? If you can believe it, Bloomberg Business reports that Sports Authority failed to capitalize on the “fitness boom.” Apparently, this represents the “one bright spot” in the retail industry that the company, for whatever reason, did not make the most of.
Certain other companies, like Target and Gap, made it a point to expand fitness offerings to remain competitive.
The second problem that led to the bankruptcy may be outside of Sports Authority’s control as a traditional brick-and-mortar business. It’s no secret that these type of companies have found it very hard to compete with the convenience of online shopping. The Wall Street Journal quoted court documents that stated Sports Authority “accumulated substantial losses” due to consumers shifting loyalties from brick-and-mortar businesses to online retailers.
“[Sports Authority] has $1.1 billion in financial debt, including more than $717 million in bank loans, and about $211 million in trade debt, or debt owed to suppliers, court papers say.”
This problem is by no means unique to Sports Authority. Walmart and Macy’s, comparative retail giants, have also had to make adjustments in the wake of changing consumer purchase methods. These changes include a more streamlined online purchase option.
While Sports Authority has an online store, it seems there is one other vital boost it could have benefited from that the company might not have ever considered.
That brings us to the third and last problem: Highly efficient competition.
Bloomberg notes that rival Dick’s Sporting Goods is flourishing. Dick’s opted to partner with manufacturers like Nike and Under Armour, giving these businesses “in-store shops” to operate. Not only is Dick’s purposely not going it alone, the company reportedly “excels in layouts and displays,” making the store more visually dazzling to potential customers.
The rival’s efforts are paying off. According to Steven Ruggiero, a credit analyst at RW Pressprich & Co., Dick’s brings in an average of $10 million per year from the average store, while Sports Authority makes $5.75 million. However, to be fair, Sports Authority is trying to turn a profit while bogged down in massive debt that hasn’t been properly handled since the company’s 2006 buyout.
The combination of missed steps, encroachment of online retailers, and inability to compete has delivered a knock-down punch to Sports Authority. The bankruptcy could represent a second chance. However, and as CNBC mentions, survival is not guaranteed.
At this point, the bankruptcy will force Sports Authority to go through a comprehensive debt restructuring program or else sell off a good portion of its assets — if not all of them.
Sports Authority CEO Michael E. Foss has since released a statement about the bankruptcy filing.
“We intend to use the Chapter 11 process to streamline and strengthen our business both operationally and financially so that we have the financial flexibility to continue to make necessary investments in our operations.”
The company is even hoping to continue honoring customer gift cards and its rewards program despite the bankruptcy process.
[Photo by Richard Drew/AP]