The Sports Authority Strike Out and Its Ripple Effects
Interview with Rick Edwards and Bob Grosskopf
Date march 2016
Featured in TSL Express
After filing for bankruptcy on March 2, 2016, national sporting goods retailer Sports Authority (TSA) announced it would close 142 stores and two distribution centers in an attempt to reorganize while looking for a buyer. As of the filing date, TSA had $430.0 million in assets and $1.51 billion in liabilities. After conducting a sale process and finding no suitable offers, TSA notified the court it would pursue a total asset sale. A joint venture comprised of Gordon Brothers Group, Hilco Merchant Resources, and Tiger Capital Group, was the successful bidder in an auction process for the disposition of the remaining 321 stores, which began yesterday. This transaction represents the largest sporting goods disposition in history.
Rick Edwards and Bob Grosskopf, co-presidents of Gordon Brothers's retail practice, sat down with TSL’s editor-in-chief to discuss the reasons for Sports Authority’s demise as well as the effects it could have on both manufacturers and landlords.
Why did Gordon Brothers and its partners in this liquidation, Hilco and Tiger, decide to bid on the Sports Authority liquidation? Was it sporting goods in general or the retailer specifically that attracted you?
Edwards: Gordon Brothers participates in many different asset-disposition projects, specifically ones of this stature with such an iconic brand as Sports Authority. We’ve been partnering with Sports Authority for approximately six months assisting them in closing over 140 stores as part of their reorganization plan. Because of this experience, we felt very confident in the asset values as well as the goodwill in the marketplace, and certainly wanted to participate in this project.
To what do you attribute Sports Authority’s inability to reorganize? Some analysts have cited their lack of uniqueness, competition from ecommerce and its failure to stay on trend. Do you think one of these stands out or was it a combination?
Edwards: Certainly all of them apply. I think some more so than others. The sporting goods industry is under incredible pressure due to the branded nature of the product which is available through multiple channels, whether it be ecommerce, other specialty retailers, or direct competitors like Dick’s. Sports Authority had been a market leader for a long time, but in this changing environment specifically in the brick-and-mortar space, big box stores are becoming less and less efficient.
Product uniqueness is also important, and there is just not a lot of unique product left in these stores. I think that’s probably the number one reason why you’re seeing not just Sports Authority, but places like City Sports and Sport Chalet, which recently closed or are closing, struggle.
Despite the health and fitness obsession of so many American consumers, brick and mortar sporting goods, as you mentioned, are struggling. Do you think they can find a way to compete with Amazon and other online outlets?
Edwards: The answer is yes. Obviously, brick and mortar will never go away, but one of the things that makes brick-and-mortar retailers successful is customer service and a unique shopping experience. Some retailers certainly do it better than others, but having that experience, is what keeps the customers coming back and loyal to the brand. The ability to offer a wide assortment & knowledgeable sales staff who can speak to the product and serve the customer goes a long way.
One challenge cited by analysts is this pattern of consumers going in the doors, only to try something on and then checking Amazon or other online sellers to price compare.
Edwards: There is no question that comp shopping does go on, it’s called “showrooming.” But certainly, as it relates to apparel, some people still like to touch and feel the product. Much of this product is priced similar no matter where you go, so outside of weekly promotions on specific items there’s not a lot of price differentiation. So it’s getting the customer in the door and maintaining the shopping experience that ultimately makes a successful retailer survive.
What kind of effect do you think this liquidation will have on the suppliers of the industry, those who are actually manufacturing the sporting goods?
Grosskopf: I think short-term it will have some effect because obviously the vendors have made the orders and planned on shipping for Sports Authority. Long-term the global demand hasn’t changed, it’s just going through different channels.
How about the many landlords who will be left with empty retail space?
Grosskopf: The best centers that are still operating today, will not have a problem filling these spaces. There are replacement tenants that will want to be in those centers. It is mid-tier to lower-level centers that will struggle. There are not a lot of retailers right now absorbing or opening this kind of square footage. We’ve seen a decline in strip-center development across this country. They’re not building very many anymore and that’s because the Big Box retailers as we discussed before, are under extreme pressure. So unless you can find an adequate replacement tenant that’s going to open up -- in this case there’s 400+ locations that are going to come on the market -- it’s going to be a struggle for these mid-tier to lower-tier centers to find a suitable replacement tenant for similar rents.
You’ve got to look at the universe and find out who is opening stores of this size and it’s certainly a challenge. While they’re still out there, in the sporting goods industry, only Dick’s and Academy are opening stores. They’re being very selective as to where they go and what locations they choose. You’re seeing consolidation and right sizing of portfolios, you can go down the list of almost any retailer of this size and square footage and they have been closing a lot of doors as they try and become more efficient.
Michele Ocejo is editor-in-chief of The Secured Lender.