Sports Authority Looks to Gain Flexibility
By George Anderson
The CEO of the Sports Authority retail chain believes the company will do better as a private company than it has done as a publicly traded organization.
“As a private company, Sports Authority will have greater flexibility to accomplish its long-term goals,” said Doug Morton.
Mr. Morton and 19 other members of Sports Authority’s senior management team along with the private equity firm of Leonard Green & Partners has offered to pay around $1.3
billion for the business.
Gary Balter of Credit Suisse said in a note to investors: “The management team was doing an excellent job of turning around the margins at this large industry player. The market’s
valuation at around six times cash flow we believe made this an attractive acquisition target. The questions now will be whether another buyer steps in.”
Mr. Balter added that the deal could turn out to be an advantage to the competition. “This will also make for a more stable pricing environment to the benefit of Dick’s margins,
as a levered Sports Authority will most likely not be aggressive in the future.”
Moderator’s Comment: What is your reaction to the announced deal to buy Sports Authority and take in private? –
George Anderson – Moderator
It is unreasonable to say that public ownership always results in the sacrifice of long-term goals for short-run profit. It is also unreasonable to say that privately-held firms are always committed to the long run, regardless of short-term pain. Some private owners are short-term maximizers and some aren’t. Same with the owners of retail stocks traded publicly. The most interesting element of this buyout is that the existing management is betting that their momentum will be positive. So are the public shareholders getting adequately compensated for giving up their ownership? Let’s see if anyone else steps up and offers a higher price.
As a matter of personal faith, it is easier for a private company to institute rational, long range and appropriate turn around plans than it is for a public company. Too much pressure remains on public companies regarding short term performance measures. The reality in any turnaround or long term strategy is that downturns in performance are not only inevitable, but often desirable or completely anticipatable. While that message may be heard in the months before when it is given to the Street, too often the analysts have forgotten by the time the results do roll around. Saying you are going to go through a tough patch before the turnaround occurs does not always shield you from the diminution in stock value when it actually happens.
The conclusion that a leveraged SA will not be as aggressive is probably analyst-speak. SA will operate toward maintained margins and GMROI standards. If aggressive pricing remains an appropriate vehicle to accomplish those, expect SA to continue in that vein.
As always, one fervently hopes that the leverage burden of taking the company private does NOT limit operational and strategic options. Having been inside one such company in the late 80’s, I know that it can and does have that impact. Still, if the time horizon for payback on the internal ownership is appropriate to the strategic plan, and that plan is both realistic and measured, then SA has given itself a tremendous advantage.
The sporting goods market has had significant consolidation, this market needs a national player who can operate without major transactions every couple years. Gart Sports was successful on its own but then had to swallow Sports Authority via buy out. Sports Authority has never been a healthy operation going all the way back to its beginning as a Kmart specialty store free standing real estate concept.
Sporting goods is again a major growth market with a lot of mom and pops still successful, which is not the case in most other category killer markets.
LBOs free companies from quarter-to-quarter scrutiny by the stock market, but they substitute oversight from the banks who finance the deals. Cost of borrowed money has an impact on net profits that poses one further limitation on a company’s margin formula. Presumably the Sports Authority buyout group has figured this into its equation.
But it’s worth remembering that investment firms like Leonard Green & Partners may be less interested in the operating profit it can derive from SA than it is in the equity gains it might realize by sprucing up the company, then either flipping it or taking it public again. Or, as we have seen in the past with other retailers, the SA real estate portfolio may justify the buyout on the basis of its asset value (I have not investigated this).
Against this backdrop of financial strategizing, it’s difficult to sort out what the company will look like merchandising and marketing-wise. Sports Authority has plenty of vigorous competition in Dick’s, Big 5, Modell’s and others, so there will be pressure to keep prices competitive and turns high.