Sports Authority Inc. filed for bankruptcy Wednesday after failing to exploit the fitness boom that’s been a rare bright spot in retail. To reorganize, it says it will try to benefit from something else: tax law.
The company has fallen far since a $1.3 billion buyout in 2006 piled it with debt. The company said in a statement following the bankruptcy filing in Delaware that it will close as many as 140 of its 463 locations. In court papers outlining its reorganization strategy, Sports Authority said it will proceed cautiously when trying to sell assets, in order to preserve $124 million in tax reductions.
“These tax savings could substantially enhance the Debtors’ cash position for the benefit of parties in interest,” the company said in court papers, indicating that it planned to seek a special court order that might allow it to sell assets without triggering a tax law that would deprive them of the ability to carry forward past net operating losses to reduce their future taxes.
As previously reported, Sports Authority missed a $21 million interest payment to loan investors in January. At that time, the company said it was in talks with lenders to discuss possible solutions to improving its capital structure.
In 2006, the chain was even with Dick’s Sporting Goods Inc. (NYSE: DKS) in sales. Today, Dick’s has hundreds more locations and takes in almost twice as much per store, making it the U.S. leader in selling athletic gear, while Englewood, Colorado-based Sports Authority’s debt load has hampered its ability to expand or innovate.
“We are taking this action so that we can continue to adapt our business to meet the changing dynamics in the retail industry,” said Michael E. Foss, chief executive officer of Sports Authority. “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 said in court papers filed along with the bankruptcy in Wilmington, Delaware that it has $1.1 billion in funded debt and 42.7 million shares of common stock outstanding. It said it has access to as much as $595 million in debtor in possession financing to help see it through the reorganization.
In 2015, sales at U.S. retailers were the weakest since 2009, according to the Commerce Department. But as big-box giants and online merchants encroached on clothing stores and consumer electronics chains, sports were one of the few healthy areas. So, as companies including Target Corp. (NYSE: TGT) and Gap Inc. (NYSE: GPS) shored up sales by expanding their fitness offerings, American Apparel Inc. and Quiksilver Inc. last year both sought creditor protection.
Sports Authority has about 200 fewer stores than Dick’s. The company said that in addition to the retail store closures, distribution centers in Denver and Chicago will be shut down or sold.
With so much debt to manage after the buyout, Sports Authority hasn’t been able to make the kind of improvements seen at its larger rival.
One area where it’s lagged is presentation, according to Joe Feldman, an analyst at Telsey Advisory Group. Dick’s excels in layouts and displays and has partnered with manufacturers including Nike Inc. and Under Armour Inc., which operate in-store shops.
Those improvements have helped Dick’s pull in about $10 million a year in sales from the average store, while Sports Authority collects about $5.75 million, according to Steven Ruggiero, a credit analyst at RW Pressprich & Co.
— By Lauren Coleman-Lochner, Steven Church and Jodi Xu Klein