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Sports Authority Faces Big Debt Wall After Dick's Pulls Ahead

  • Revenue hasn't changed much since it went private in 2006
  • ‘It just doesn't sound like they've been able to keep up’

When Sports Authority went private in a leveraged buyout nine years ago, it was vying to be the largest sporting-goods retailer in the U.S. It isn’t any more.

Competitors swooped in and grew, while Sports Authority barely moved the needle on annual revenue. It has little to invest to turn things around as it faces a deadline to refinance almost half of its debt, and has hired restructuring advisers. To reassure suppliers the company would have enough money for the holiday season, lenders injected $95 million in recent weeks, according to people familiar with the situation.

What makes the struggles more surprising is that it’s in one of the few healthy areas in retail. “Fitness has taken off,” said Raoul Nowitz, a managing director and restructuring consultant at Solic Capital. “If you can execute, you should be able to get your share -- and it just doesn’t sound like they’ve been able to keep up.”

The sector’s so hot that rivals have been piling in, from Amazon.com Inc. to merchants like Target Corp. to specialty retailers including Lululemon Athletica Inc. and Gap Inc.’s Athleta.

And then there’s the reigning king, Dick’s Sporting Goods Inc. According to analysts, it’s been doing what Sports Authority should have been all along, by expanding online and with new locations. Today Dick’s is the largest sporting-goods chain, with $6.8 billion in sales last year and 645 stores. Nine years ago, the two were neck and neck in revenue.

Store Presentation

Officials at private equity firm Leonard Green & Partners LP, which lead a group that bought the company for $1.3 billion, didn’t respond to e-mails and phone calls. Sports Authority declined to comment.

“Historically, the Sports Authority has not always operated the tightest ship when it comes to store presentation,” said Joe Feldman, an analyst at Telsey Advisory Group. In contrast, he said, Dick’s excels in layouts and displays, and has partnered with manufacturers, including Nike Inc. and Under Armour Inc., that operate in-store shops.

An average Dick’s store has $10 million in annual sales, including those made online, compared with $5.75 million at Sports Authority, said Steven Ruggiero, a credit analyst at RW Pressprich & Co. Sports Authority’s operating income -- profit after subtracting costs of goods sold and other expenses -- hasn’t changed much in five years, inching up to $113.3 million in the year ended in February from $109.4 million in 2011, according to IBISWorld Inc. That figure in the same period for Dick’s climbed 79 percent, to $554.1 million.

New Carpets

Sports Authority’s annual revenues, at about $2.7 billion, are roughly the same as in 2006, according to Michael Zuccaro, an analyst at Moody’s Investors Service. That compares with $6.8 billion at Dick’s.

And there’s pressure on Sports Authority, with its $300 million term loan coming due in May 2017. That has to be refinanced a year in advance or it’ll become a current obligation, which is tougher to take care of. The retailer has at least $643 million in debt, comprised of that loan and a newly extended $343 million in subordinated notes maturing in 2018, according to data compiled by Bloomberg and Moody’s. There’s also $650 million in an asset-backed revolving loan that provides money for day-to-day needs. It’s unclear how much is drawn under that facility.

‘Underinvested’

IBISWorld estimates profit margins will improve as the company expands sales of its own brands, and Zuccaro said it’s been taking some positive steps, remodeling stores and boosting clothing and footwear as a percentage of sales. The problem is that since the buyout, “they’ve underinvested,” said Morningstar Inc. analyst Paul Swinand. “They did update some stores, but it was just not nearly enough to change the carpets if there was a new Dick’s opening in a new shopping center down the street.”

Leonard Green is also a part-owner of BJ’s Wholesale Club Inc. and Jo-Ann Stores, as well as J. Crew Group Inc. That chain’s $500 million 7.75 percent senior unsecured bonds maturing in May 2019 are the worst-performing retail bonds in the U.S. this year, last trading at 27 cents on the dollar on Dec. 7, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Advisers Arrive

Senior lenders to Sports Authority have brought in investment bank PJT Partners Inc. and law firm Brown Rudnick LLP, and the company has hired advisers including Rothschild & Co. to manage its more than $643 million in debt, Bloomberg News reported earlier. The company is also working with Gibson Dunn & Crutcher LLP, according to people familiar with the situation. A spokeswoman at Gibson Dunn declined to comment.

Little is crystal clear about the company’s finances, since it doesn’t submit publicly available regulatory filings, hold conference calls or release earnings reports. Zuccaro said there’s still enough information to conclude Sports Authority is in trouble.

Debt to earnings before interest, taxes, depreciation and amortization ratio jumped to about 6.3 times as of May, he wrote in a July report, from 4.7 two years earlier. EBITDA-to-interest is a measure of how well a company can service its debt, and Zuccaro said the Sports Authority’s ratio is “well under” 1, meaning earnings aren’t sufficient to cover interest payments. Just two years ago, that ratio was 1.2.

“At these levels,” Zuccaro said, “refinancing could be a challenge.”

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