Sports Authority seeks tax savings as it files for bankruptcy

March 2, 2016 10:35 AM

(Bloomberg)—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. Sports Authority, No. 277 in the Internet Retailer 2015 Top 500 Guide, 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.

In an email to customers Wednesday afternoon, CEO Michael Foss said the restructuring should not affect them beyond the store closings, which will occur in the next three months. "While no stores are being shut immediately, if the store where you regularly shop is ultimately closed, you can use the Store Locator on our website to find the nearest Sports Authority location. In addition, you always can find all of our brands at the same great values online at," he wrote.

"We do not expect there to be any impact on gift card balances or your ability to use gift cards at our stores or online at this time. In addition, there should be no changes to our return/exchange policies at our go-forward stores or our customer loyalty program, The League," Foss wrote.

In 2006, the chain was even with Dick’s Sporting Goods Inc. (No. 70 in the Top 500) 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, Colo.-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,” Foss said after the filing. “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, Del., 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.

2015 sales

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.

Companies including Target Corp. (No. 16) and Gap Inc. (No. 18) shored up sales by expanding their fitness offerings, American Apparel Inc. (No. 330) and Quiksilver Inc., No. 703 in the Internet Retailer Second 500 Guide, 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 has 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.

The case is: In re Sports Authority Holdings, Inc., 16-10527, U.S. Bankruptcy Court,District of Delaware (Delaware).




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