What Sports Authority's Bankruptcy Filing Means for Dick's Sporting Goods

Dick's Sporting Goods in Spokane, Wash. Image source: www.dickssportinggoods.com.

On March 2, privately held retailer Sports Authority announced that it was seeking Chapter 11 bankruptcy protection in an attempt to restructure its business. It's yet another sign of the struggles many retail businesses have been experiencing in the era of online shopping. Investors in rival Dick's Sporting Goods will no doubt be watching the court proceedings with keen interest. Is Sports Authority's pain an ominous sign of the future for sporting-goods stores? Or is there something to be gained here for Dick's Sporting Goods' business?

A rundown of the situationSports Authority's restructuring plan revolves around the renegotiation of debt with creditors as well as the renegotiation of property leases. Sports Authority is planning to close or sell about 140 of its roughly 450 stores and two distribution centers (in Denver and Chicago). Planned store closures are concentrated in the key states of Texas (25), California (19), Florida (18), and Illinois (11), and it will gradually close down these locations through June.

"This decision follows a comprehensive review of the Sports Authority store portfolio in light of the increasing amount of shopping that is occurring online," the company wrote in its press release announcing the Chapter 11 filing. "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."As Sports Authority has been unable to keep up with changing shopping trends and promote interest in its online store, sales and profits have lagged to the point that the company can no longer keep up with overhead costs.

What this means for Dick's Sporting GoodsSports Authority and Dick's Sporting Goods are the two largest players in the sporting goods box store arena. Both have had their struggles in recent years, as today's consumers increasingly switch their shopping habits to an online format. With less overhead costs, Sports Authority may be able to refocus efforts on online sales if the store count drops by a third. Dick's, with its roughly 650 locations, plus 75 Golf Galaxy and 12 Field and Stream stores, has traditionally focused efforts on growth through brick-and-mortar locations. The company has been pushing for Internet sales, however, in recent years. For 2015, the company reported about 10% of sales coming from its website, compared with 9% in 2014. In the fourth quarter of 2015, Internet sales topped 15% of revenue.

What Sports Authority's changes mean immediately for Dick's is that a large competitor is shrinking in size. Trailing-12-month revenue for Dick's and Sports Authority is about $7.2 billion and $3.2 billion, respectively. With a third of Sports Authority stores closing, thatcould equate to a substantial amount of revenue up for grabs. One metric of growthDick's cites in quarterly earnings reports is same-store sales growth. That metric was as follows for the past four quarters:

Quarter of 2015 Fiscal Year

Same-Store Sales Growth Over Prior-Year Period

Fourth quarter

(2.5%)

Third quarter

0.4%

Second quarter

1.2%

First quarter

1%

Source: Dick's Sporting Goods' fiscal 2015 quarterly earnings.

Having to compete with 140 fewer stores nationwide is a positive for Dick's going forward. Having a strong network of physical stores allows Dick's to be able to alsooffer in-store pickup, giving it a leg up when competing for customers who prefer the in-store experience over a virtual one. With Sports Authority reducing its physical presence, this is an option Dick's could potentially exploit in the future.

Another option that may be explored is the purchase of Sports Authority's remaining locations.While specific suitors have not been mentioned in the bankruptcy proceedings, the idea has been mentioned as a possibility.A purchaseby Dick'swould effectively make it the only business of its kind operating on a national scale. Competitors such as Big 5 Sporting Goods operate more on a regional basis. Other sports-apparel stores, such as Foot Locker , operate in more of a niche environment, focusing attention on a particular area of apparel or sports gear.

Dick's certainly has the means to pursue a potential purchase and consolidation of the remaining Sports Authority assets. The company reported in its last quarterly earnings total cash of almost $120 million, with debt totaling only $5 million. With this type of balance sheet flexibility, Dick's Sporting Goods could put itself in position to become one of the only omni-channel retail stores offering a diversified mix of products on the national scene.

The article What Sports Authority's Bankruptcy Filing Means for Dick's Sporting Goods originally appeared on Fool.com.

Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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