Since Sports Authority went bankrupt in 2016, CNBC’s Jim Cramer has watched the sports retail and athletic wear cohort endure widespread weakness.
At first, the shortcomings were understandable, the “Mad Money” host said. Sports Authority, once the nation’s largest independent sporting goods retailer, was shuttering its stores, leaving fewer places for consumers to buy athletic products and an overflow of inventory.
“But now we’ve lapped the store closures and yet things just keep getting worse, something very few foresaw,” Cramer said.
Cramer argued that Sports Authority’s demise, which began with a leveraged buyout and ended with a botched restructuring program and crushing debt, cast a visible shadow on the sports retail industry.
In response to the bankruptcy, Under Armour cut its guidance, incurred a $23 million impairment charge and forecast $120 million in sales losses because of the store closures.
The next day, Nike was downgraded by a Morgan Stanley analyst due to competition from Adidas and Under Armour and, more importantly, weakness in brick-and-mortar sports retail.
Columbia’s sales got hit as well: in 2015, they grew by 10.7 percent; in 2016, sales grew by a mere 2.2 percent, even as gross margins expanded.
All three companies — and VF Corp., an apparel retailer with less exposure to athletic wear — also saw an explosion of inventory. When companies are housing too much product, they must discount it to be able to bring in new merchandise.
“Things then got real ugly. A year ago, many investors were still optimistic this would just be merely a temporary disruption,” Cramer said. “The idea was that, eventually, Sports Authority’s closure would benefit competitors like Dick’s [Sporting Goods] or Finish Line or Foot Locker. Man, that’s not how it played out at all. If anything, the same-store sales from these sports-oriented retailers have just cratered.”
In short, the Sports Authority bankruptcy brought lasting damage to the brick-and-mortar vein of sporting goods retail, the “Mad Money” host said.
Instead of forcing price points on consumers like in sports retail’s good old days, sportswear companies now have to find new ways to sell their products, which sometimes include lowering prices.
The one exception is VF Corp., which has taken to building out its e-commerce and direct-to-consumer channels.
“VF Corp. seems to have seen this transition coming — you don’t just build out a strong online business overnight — and its gross margins are now bouncing back. Turns out, like with so many other product categories, people just don’t want to buy this stuff in the store if they can get it online,” Cramer said.
But the group is still far from recovery. Teenagers’ changing tastes are threatening sales, and many of the sports apparel stocks trade at lofty valuations.
“In retrospect, the bankruptcy of Sports Authority was a watershed moment for the athletic wear group,” the “Mad Money” host concluded. “It signaled that the brick-and-mortar side of things was going into secular decline — it wasn’t one-off — and the sports apparel makers would no longer be able to impose their will on the industry or the customer in terms of pricing. That’s why Nike, Under Armour and Columbia Sportswear remain houses of pain here. But VF Corp., they saw it coming, and you know what? I think it’s still a good stock, even right here.”
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Source: Investment Cnbc
Cramer explains how Sports Authority's bankruptcy cast a shadow on athletic retail