Vestis Becomes the Latest Victim of Fierce Retail Competition

Sean O’Reilly: So, Vince, digging in here
to the world of sports retailing. We’re touching on a subject I kind of noticed, just observing
the retail world in the last 10 years. Sports retailers are not doing so hot. Vincent Shen: Obviously, this is one niche
of the broader retail space, especially if you’re thinking leisure, with leisure wear,
which is a big part of these businesses. But I just thought it was interesting, because
it kind of reflects a lot of the challenges that a lot of retailers are having now. So,
we’ve heard a little bit about these struggling brands, and probably a lot of us are familiar
with them. Think for a second about Sports Authority. Was previously the largest sports
equipment chain. The product of many, many acquisitions. It was taken private in a leveraged
buyout deal. But, they filed for bankruptcy protection in March. They’re closing about
140 of their 460 locations. And their current owner is private equity firm Leonard Green
& Partners. So, they bought– O’Reilly: The bought the thing in bankruptcy? Shen: No, that’s currently. They purchased
Sports Authority for about $1.3 billion in 2006. Over time, they’ve accumulated about
$1.1 billion of debt, usually a pretty common characteristic of these LBOs, and the company
has struggled to operate under that kind of debt pressure. So, in January, they missed
an interest payment. And since then, they’ve been pretty actively looking for, essentially,
a white knight buyer to come in and save the company. And though management mentioned they’ve
received a lot of high interest from buyers, nothing really came together. So, they’re
in bankruptcy protection now. Interestingly, for fiscal 2015, that ended
January 30th, 2016, the company had revenue of about $2.6 billion, so still a pretty big
business. Like I said, 460 locations. But, it had before-tax losses of $156 million,
according to the Wall Street Journal. And there’s going to be a two-part auction. On
May 4th, they have leases for over 100 of their closing stores going up for sale, and
the remainder of the assets — so, pretty much everything — potentially go up for bidding
about two weeks later on May 16th. There’s been interest, obviously, from other competitors
who are still going. So, think privately-held Academy Sports + Outdoors, Dick’s Sporting
Goods, Modell’s, which is family-owned, have all talked about getting involved in the bidding
process. So, on the one hand, you have competitors
who might purchase assets and keep stores open as a going concern. On the other hand,
you have liquidation firms that might outbid them and just buy it out and liquidate all
the assets. So, it’ll be interesting to see what’s left of Sports Authority. It’s still
a big brand, I’d be surprised to see every single store close. O’Reilly: Yeah, it’s wild. What’s the deal
with City Sports? Shen: City Sports is a smaller example. That
actually happened about last October. They’re based out of Boston. Again, just another example,
smaller chain, filed for bankruptcy last year. They closed eight of their 26 locations, and
investors ended up buying some of their intellectual property. So, they’re hoping to revive that
chain. But, in very recent news — this just happened yesterday — we have Vestis Retail
Group. So, again, yet another example of the dominoes falling at this point for this industry.
They operate a lot of big chains most people will be familiar with — Eastern Mountain
Sports, Bob’s Stores, Sports Chalet, which is out on the West Coast. They are run by
Versa Capital Management, a private equity firm. They acquired each of these chains separately,
and essentially put them under a single umbrella. So, they specialize in turning around some
of these distressed businesses. So, Vestis was formed in 2012, after buying
out Eastern Mountain Sports and Bob’s. They added Sports Chalet in 2014. But the thing
is, Sports Chalet was already struggling significantly. They’d been in business for over half a century
at this point, but they’d been scarred by a lot of losses, declining results in the
last 12 months. They were public, and in their last 12 months as a public company, reported
$343 million in revenue. Bottom line lost $9 million, or $0.64 per share. Another big
thing you’ll notice, their gross margins, for example, declined from about 30.5% in
fiscal 2010 and 2011 to 26.7% by the time the company was acquired. O’Reilly: And that, of course, implies they’re
having to cut prices in order to move products, which is never good. Shen: Obviously, they were struggling with
their operations. So, Sports Chalet is done. Versa’s hoping to maintain Bob’s Stores and
Eastern Mountain Sports. But Vestis CEO Mark Walsh — and I wanted to mention this specifically
— cited online competition and warm winter weather as some of the drivers for the tough
times that the different store– O’Reilly: I don’t buy that winter weather
thing. (laughs) Shen: That’s a one-time thing. Going bigger
picture, those are just some of the examples of the brands or chains that have fallen victim
to this very competitive environment.

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