Tuesday, April 26, 2016

Sporting Goods Chains Continue to Strike Out

A recent string of bankruptcies by sporting goods retailers certainly gives one reason for pause, and requires a look into the WHY.

The first announcement came last October when City Sports filed for bankruptcy, which led to the eventual closing of all 26 locations. Its CFO indicated that the company faced an “extremely competitive market” for name-brand athletic apparel from brands such as Nike and Under Armour. He also noted that severe weather during the prior winter had put a damper on sales.

Then, just last month, Sports Authority announced that it was filing for bankruptcy and closing 140 of its 450 stores, nearly one-third of the chain. The press release out of its headquarters indicated that “this decision follows a comprehensive review of the Sports Authority store portfolio in light of the increasing amount of shopping that is occurring online.  As a result of these changes in consumer buying patterns, Sports Authority determined that it needs fewer stores as part of its long-term business model.”

The latest in this string of sports store closings occurred this month, when Vestis Retail Group, operator of the Eastern Mountain Sports, Sport Chalet, and Bob’s Stores chains, filed for bankruptcy protection after failing to adjust to changes in U.S. shopping habits, especially among young people. While store closings include only one Bob’s Stores and eight EMS units of the 35 and 69 stores currently in operation, respectively, Vestis will shut down all 47 Sport Chalet stores, which operate on the West Coast. It should be noted that, as we have seen too much in recent years, the first store closing announcement from a struggling chain is often not the last.

The common denominator among these bankruptcies is that all of these companies were saddled with major debt, constraining them from upgrading stores and investing in e-commerce, leading to an inability to compete effectively with the likes of Dick’s Sporting Goods, REI, and Amazon among others.  While this might all seem like a boon to a chain such as Dick’s, we shouldn’t be so quick to rush to that conclusion. Remember when Bed Bath & Beyond was supposed to benefit from the windfall coming from the Linens ‘N Things demise, or when Best Buy was ready to dominate electronics following the Circuit City liquidation? Neither has effectively done so, and both have had their share of problems since.

Internet retailing certainly got in the way, as it has for virtually all brick-and-mortar chains. In fact, examining the most recent three-year period for which data is available, e-commerce sales in sporting goods grew at a significantly faster rate than e-commerce sales on the whole. During the 2011-2014 time frame, e-commerce sales in sporting goods experienced strong gains of 24.0%, 24.9%, and 18.9% in consecutive years. Total e-commerce sales increased at more moderate – although still significant - rates of 15.0%, 13.3%, and 15.2%, respectively.  For comparison, total sporting goods sales, including the brick-and-mortar side of the business, increased 8.1%, 5.3%, and 0.6% between 2011 and 2014 while GAFO (General Merchandise, Apparel, Furniture, and Other Miscellaneous Retail Stores) sales, which exclude auto and food sales, gained 3.2%, 1.9%, and 2.1%. These sales growth comparisons are illustrated in the table below:

The online competition for brick-and-mortar sporting goods stores has been coming not only from Amazon, but also from the major brick-and-mortar sports chains themselves. Additionally, sporting goods manufacturers such as Under Armour and Nike, which have been traffic-driving brands for companies like Dick’s and Sports Authority, are now selling direct-to-consumer. Because of this, and despite their own online offerings, brick-and-mortar chains are finding it extremely difficult to keep up with the marketing efforts of Under Armour, Nike, and their like. As a consequence of all these factors, physical store traffic continues to be diverted to online shopping alternatives.

Sporting goods retailers at the top of the food chain, such as Dick’s, will continue to face financial challenges as they navigate through the new world of retailing; but their scale should allow for long-term viability, keeping them in the game. The little local guys and the small regional chains, and even some former heavy hitters, may not be able to hit the curve ball much longer.

Bob Sheehan, Vice President of Research


Appointment: KSmith@KeyPointPartners.com, 781.418.6242


US retail sales fell 0.3 % in March, the Commerce Department said. The decrease was led by a drop in auto demand of 2.1% in March, the biggest decrease since February 2015. Excluding autos, purchases rose 0.2% last month after little change in February. Americans spent more at gasoline stations, building suppliers, and health and personal-care stores, and cut back at restaurants and bars, clothing stores and department stores. Among retailers reporting monthly comp-store sales, L Brands was up 3.0%, Gap was down 6.0%, and Costco sales rose 1.0%. Rite Aid is no longer reporting monthly, but will report quarterly - leaving only 3 retailers on our list reporting monthly sales - see our sales reports below.


Urban Outfitters is experimenting with larger-sized “ultimate experience” stores, ranging in size from 20,000 to 30,000 s/f for its Anthropologie brand.The latest location to feature the expanded format is the recently expanded store in Portland, OR. Urban Outfitters’ Free People division is also getting a slightly larger box, with its footprint expanding from some 3,500 to 4,000 s/f. The brand will open 12 stores this year...Irish firm Danu Investment Partners Ltd. has acquired Smith & Wollensky Restaurant Group Inc. from a Bunker Hill Capital LP consortium. Terms were not disclosed. Danu now owns 7 of the 8 US locations, and worldwide licensing rights to the Smith & Wollensky brand...Covelli Enterprises, the largest franchisee of Panera LLC, opened the 2,000th US Panera Bread last month in Ohio...Sportsman’s Warehouse plans 11 new stores for 2016. This year will give the company 75 locations in 20 Western states and Alaska...Nordstrom plans to open one new Nordstrom Rack store at District Center in Washington, DC in fall 2016 and another in Texas in spring 2017...Signet Jewelers plans to open 145 to 178 units, and close 61 to 87 units. Last year, Signet opened 108 stores and closed 62. The company had 3,625 units as of the end of January...Five Below entered a new market with the opening of 3 Louisiana stores. Five Below plans to open 85 new stores this year. The company operates 444 stores in 27 states... Macy’s will open a new Bloomingdale’s Outlet store in November 2016 at The Outlets at Orange, CA, the 17th Outlet location since 2010....Tampa-based Benzer Pharmacy expects to reach 600 stores this year and 1,500 under the Benzer name by the end of 2017. Benzer started with a single store in 2009 and has grown primarily through acquisitions of small mom-and-pops... Hudson’s Bay Co. will open 7 new flagship Saks stores and 32 new Saks Off 5th off-price stores in the next few years, which will be added to its existing 38 Saks Fifth Avenue stores and 90 Off 5th stores....Petco will open 7 new stores in April as part of its 2016 growth plan, which includes 20 new store openings year-to-date. Petco operates more than 1,430 locations across the U.S., Mexico and Puerto Rico... H&M plans to open a total of 425 new stores this year, and expand its e-commerce efforts to Japan and 10 additional markets. Based in Stockholm, Sweden, H&M operates stores under its namesake banner as well as COS, Monki, Weekday, Cheap Monday, & Other Stories. The company currently has more than 3,900 stores...Casual wear, work wear, and accessories seller Duluth Trading Company opened 3 new stores to end the year with 9 locations. The company expects to open 4-5 new stores this year and 7-8 locations in 2017... Margaritas Mexican Restaurant, with 25 locations throughout New England and Pennsylvania, expects to add five new restaurants to the system through existing franchise deals and corporate-owned restaurants...Canadian chain Earls Kitchen + Bar, with 59 locations north of the border, has seven US locations with two more set to open this year, in Boston and Orlando. The chain also plans to open one new location in each country next year.


Finish Line has closed 54 stores as part of its plan to shutter 150 locations. The retailer plans to close about 25 stores in fiscal 2017, Finish Line opened 8 stores in the past year and plans to open up to 7 others. Finish Line ended fiscal 2016 with 591 stores...Destination Maternity will close 25 to 30 stores and open 7 to 10 new stores... After announcing bankruptcy in February, Hancock Fabrics has announced that they are closing all 185 stores. Liquidation sales have already started, both online and in-store. Hancock Fabrics filed for bankruptcy in 2007 and reorganized, filing again in February of 2016. There has been no exact date announced for closings...L Brands announced a series of broad changes at its Victoria’s Secret division, eliminating the jobs of approximately 200 people at its Columbus, OH, and New York offices and splitting the division into three business units. Certain merchandise categories will be eliminated as the brand refocuses on core categories...Pacific Sunwear of California Inc. filed for Chapter 11 bankruptcy court protection. PacSun said it would continue to operate all of its 593 stores and does not expect the bankruptcy filing to have an immediate impact on employees... Vestis Retail Group LLC, operator of Eastern Mountain Sports, filed for bankruptcy protection. Vestis, which also runs the Sport Chalet and Bob’s Stores chains, is owned by Philadelphia-based private equity firm Versa Capital Management. Its Chapter 11 petition filed in Wilmington, DE, listed as much as $500 million in liabilities and less than $50,000 of assets. The restructuring will focus on Eastern Mountain Sports and Bob’s, while all 47 Sport Chalet stores will be closed. 56 locations will be shuttered in total, including one Bob’s store in Portland, ME, and 8 EMS locations.

New England

Rockland Trust’s parent company has agreed to acquire the parent of the Bank of Cape Cod for $31 million. The deal will add four locations to Rockland Trust’s existing fleet of branches on the Cape. The deal must be approved by shareholders of Bank of Cape Cod parent New England Bancorp and is expected to close in the fourth quarter of 2016... Fast-casual chain b.good is opening a Woburn, MA location at 4 Cummings Park this summer, the 17th b.good in the state. The chain has 9 33 locations in 9 states and Canada...Firehouse Subs opened of its first location in CT last month. This is a milestone for the brand as it enters its 44th state and continues to expand in the northeast. Firehouse Subs has over 960 restaurants in 44 states...Staples has teamed up with Boston co-working company Workbar in a deal that will turn part of a select group of Staples stores in Danvers, Norwood and Brighton into shared office space. The 2,500-3,500 s/f facilities will offer high-end workspaces, conference rooms, private phone rooms, Wi-Fi, printers, and coffee and tea. The locations within Staples will be operated by Workbar. Workbar has 14 MA locations....Target has acquired the land at 7 Allstate Road in Dorchester where its South Bay Center store is located for $18 million. Target also acquired the landlord’s interest in the building...Ethan Allen opened a new design-oriented retail format at Garden City Center, Cranston, RI. The 6,000 s/f store features an open floor plan, and showcases the company’s new interactive design service... Whole Foods will open its new location on Route 110 in Westford May 4. The 43,000 s/f store is located in a former Market Basket...Under Armour will open its second-largest store in North America in Boston’s Prudential Center this fall, in an 18,000 s/f space... Stop & Shop Supermarket Company has opened a “Green Energy Facility,” in Freetown, MA, that will convert inedible food from Stop & Shop’s 212 New England stores into energy that will help power the company’s distribution center in Freetown. The facility is expected to process an average of 95 tons of inedible food per day.  As the food breaks down, it produces gas that fuels a generator that, in turn, generates electricity. The energy produced by the 12,000 s/f facility will provide up to 40% of the 1.1 million square-foot Freetown distribution center’s energy needs, enough power to operate the facility for four months out of the year. Once fully operational, the facility will create approximately 1.25 megawatts of clean electricity.


Notes: figures gathered from individual company websites, press releases, and Federal filings.  Not all companies report all figures; results not reported will be marked “n/r”. Quarterly results will be updated when available; quarterly figures are shown in italics. Figures from companies not calculated to one decimal point automatically received an ending digit of 0. 


US retail sales fell 0.3 % in March, the Commerce Department said.  The decrease was led by the biggest drop in auto demand of 2.1% in March, the biggest decrease since February 2015. Excluding autos, purchases rose 0.2% last month after little change in February.

Source: U.S. Department of Commerce - commerce.gov


Treasury Yield Sources:  federalreserve.gov; ustreas.gov


The Conference Board Consumer Confidence Index®, which had decreased in February, improved in March. The Index now stands at 96.2 (1985=100), up from 94.0 in February. The Present Situation Index declined moderately from 115.0 to 113.5, while the Expectations Index increased from 79.9 to 84.7 in March.

Source: The Conference Board - www.conference-board.org


Manufacturing expanded in March as the PMI® registered 51.8 percent, an increase of 2.3 percentage points from the February reading of 49.5 percent, indicating growth in manufacturing for the first time since August 2015 when the PMI® registered 51.0 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws