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

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