How Sports Authority went bankrupt—and who could be next to fall

Sports Authority, which was once the largest chain of its kind in the U.S., filed for chapter 11 bankruptcy on March 2, and the sporting goods retail industry is shaking from the impact. Bloomberg reported that baseball cap and hockey gear manufacturer Performance Sports Group subsequently cut its outlook by 66%, and suggested that liquidation sales at Sports Authority stores located near Dick’s Sporting Goods stores might affect the latter’s bottom line until the second half of 2016.

Even though Dick’s, widely seen as Sports Authority’s biggest rival, is likely going to pick up both real estate and market share in the wake of the bankruptcy, the immediate outlook is tense. That’s not terrific news for Dick’s, especially in light of its just-released fourth quarter earnings, which showed comps down 2.5%.

That said, Dick’s is not suffering from some of the financial problems that plagued Sports Authority, either. In a press release about the bankruptcy, Sports Authority laid most of the blame for its troubles on financial burdens that proved too overwhelming. The company stated that it has been working with advisors in the past few months leading up to its Chapter 11 filing “to conduct a strategic review of its business and evaluate options for strengthening [Sports Authority’s] financial position.”

Contacted by Retail Dive, Sports Authority declined to provide any additional commentary on the matter, according to Alyssa Linn, senior associate at Sard Verbinnen & Co., the strategic communications firm handling Sports Authority's bankruptcy.

But in the same press release announcing the company's bankruptcy, Sports Authority CEO Michael Foss spoke volumes when he said the chain’s current predicament is due at least in part to “changing dynamics in the retail industry.”

What happened at Sports Authority?

One of Sports Authority’s biggest problems was unquestionably its debt, according to analysts. “When we picked up coverage on Sports Authority in May 2015, earnings weren’t that great,” said Reshmi Basu, associate editor at Debtwire, an intelligence service that researches and reports on corporate debt situations. “The company’s revenues were flat from 2013 to 2014, but also, they were trying to invest heavily in e-commerce and store remodels. It’s a very over-leveraged company, and it had $1 billion in debt coming due over the next two years.”

Basu said that in addition to its debt problems, Sports Authority had to compete with Dick’s, which has the liquidity and sales figures to weather market fluctuations, and Amazon, which is taking away market share from many big box stores.

Retail differentiation is also an issue. Competition from omnichannel merchants, as well as brands themselves, made it difficult for Sports Authority to stand out in the marketplace. “From a high level, Sports Authority failed to differentiate itself as a brand over the last few years,” said Lee Peterson, executive vice president, brand, strategy and design, at WD Partners, a customer experience expert for global food and retail brands.

Peterson said that strategy miss allowed the big box stores such as Wal-Mart and Target, as well as Dick’s and brands such as Nike (which has its own stores), to push Sports Authority towards irrelevancy.

Then there was the issue of online encroachment. “From a more tactical level, Sports Authority moved too slowly to compensate for the mass consumer movement to shopping online, and Amazon in particular. [If you] still have over 450 stores in dire need of a refresh in this day and age, you’d better have a great private label brand, wonderful sales people, and a great store environment. Sports Authority has none of that,” Peterson said.

Basu agreed that the online threat is a big problem for retailers such as Sports Authority. “Amazon Prime makes it more accessible to shop with them,” she said. “The way I look at retail is that the number two brick-and-mortar player isn’t big enough for the market to absorb. For example, Linens 'n Things market share went to Bed Bath & Beyond. The number two player has kind of fallen off lately. The market can’t absorb it.”

What about athleisure?

Another problem for Sports Authority was its inability to jump on trends. In a fast fashion-driven consumer environment, that can become a fatal flaw.

“I never thought of Sports Authority as an athleisure destination,” said Basu. “They couldn’t be Lululemon or Under Armour. And Under Armour has its own website, and you’re seeing it expand. And Foot Locker has a better feel to it. Sports Authority didn’t look like it was on-trend.”

For chains that can move on trends, the introduction of fresh merchandise can be a real boon. But in an over-saturated market with a lot of players, the lack of novelty is potentially devastating.

“I think athleisure has actually helped some large chains like Nike and Dick’s, both of which have opened athleisure concepts or sell more of those products now at retail,” said Peterson. “This is another area that Sports Authority moved too slowly on. There’s a lot to learn from Lululemon, but Sports Authority picked up very little from Lululemon’s success.”

Peterson blames a lack of vision at the corporate level. “Any time you see a company move slowly on trends, it’s usually a lack of leadership, which creates bureaucracy, [which] creates stagnation,” he said. “I know Sports Authority opened some ‘new look’ stores with interesting names, but when you went inside, there was actually nothing new. The new stores just looked like the old ones. [It looked like] a sports department store, versus what’s much more successful today, which is experience stores, like Lululemon or Nike.”

For Basu, it wasn’t simply a misstep in terms of leadership, but also in terms of financial flexibility. “I think Sports Authority didn’t have the means to pivot toward the trends, and so it came too late to the game,” she said. “By the time Sports Authority could invest in the trends, it had too much on its balance sheet. And it could have offered things on its website, but then it would have been hurt by shipping costs.”

Which other chains are in trouble?

As the market narrows, more stores will be seeking ways to distinguish themselves with consumers while competing in an omnichannel world that offers free shipping and vast selections. In addition, brick-and-mortar-based businesses will need to find ways to bring in an increasingly experience-driven customer.

“Stores that are over-leveraged and have a lot of debt and have loan maturities coming up might be in trouble,” said Basu. “As an investor, am I going to put money into a brick-and-mortar business? America is already over-stored, and you see more wholesale brands going direct-to-consumer e-commerce. So you want to make shopping an experience.” Basu said that chains such as Cabela’s, with its experience-based atmosphere, and Foot Locker, with edited, smaller stores and a refined brand identity, are able to create spaces that draw in customers.

Peterson agrees that stores that don’t take into account an interactive user experience will be in trouble moving forward. He cited the example of Finish Line, the embattled athletic shoe retailer that in January announced plans to close up to a quarter of stores over the next few years following declining sales and supply chain disruptions.

“I’d say Finish Line is in the sights of failure,” said Peterson. “As an example, a while ago, Finish Line’s CEO [Glenn Lyon, replaced in January by Sam Sato] moved to open a showroom store, but after the ideas went through the executive team, the concept came out the same as the current stores. That’s stagnation.”

When reached for comment, Finish Line corporate communications team declined to respond to Peterson's comments, saying that the company is currently in a quiet period in advance of its upcoming earnings call.

By contrast, Peterson said, competing sporting goods retailers are actively working to shore up their market shares. He said Dick’s has done a great job in building its own brands, while Foot Locker has focused on hot products. Both stores, Peterson said, have opened smaller, more focused concept spaces which let them learn more about specific products and refocus their brands to appeal to younger, digitally-native customers—the types of steps that Sports Authority failed to take.

“Movement to newer ideas quickly is imperative. We’re not in a ‘Wait and see what happens’ era anymore, like it was the in the ’90s," Peterson said. "If retailers don’t move quickly to protect assets with better e-commerce and much better store experiences, especially with service, you will see a lot of closures in the next five years.”