We’re all watching the continuing rationalization of our retail space. I suppose “rationalization” is a way too benign sounding word for a process that includes bankruptcies, store closings, job losses, margin hits, too much inventory, and struggles to increase sales and even to stay in business.
As ugly as this continues to be, there are going to be opportunities for the brands and retailers who get through it. I’m going to take some comments from Dick’s Sporting Goods most recent conference call to help us think about the upside and downside of the process. Dick’s, I suspect, will do just fine over the medium to long term because with the demise of The Sports Authority, there just aren’t that many larger, national big box competitors left (Academy has like 200 stores in 15 mostly southern states. Who else?). Dick’s ended their most recent quarter with 647 Dick’s stores. They also own Golf Galaxy and have some Field and Stream stores I guess.
First, here’s CEO Ed Stack’s comment on the market.
“There is lot of activity in the sporting goods landscape right now. The long-awaited consolidation is taking place. Over the past several months, City Sports in Boston is liquidated, Sport Chalet has announced the closing of all of their stores, the Sports Authority is in the midst of liquidating and closing their 400 plus stores and others are evaluating strategic alternatives. Although it’s a mess, it’s a great opportunity for DICK’s Sporting Goods.”
Mess is as good a descriptor as I can come up with.
Next, and probably to nobody’s surprise, I’m going to go right to Ed’s comment on Dick’s balance sheet. “We also have a very strong balance sheet with no long-term debt to help us through the consolidation process.”
It’s your balance sheet that lets you get through tough times and take advantage of competitors’ travails. It’s the reason you can continue to pursue your strategy when others have to take a detour.
As Ed Puts it, “…I think one of the smartest things that we did versus some others is that we have no debt and a number of these retailers had a significant amount of debt when business gets softer it gets difficult. So we know the debt that TSA had, we know that whatever Vertis had, they had. But we’re debt-free. We can get through these difficult times much easier than some of these other retailers did.”
I’ve got one more balance sheet comment to point you at. CFO Teri List-Stoll tells us, “Total inventory increased 7.3% for the end of the first quarter of 2016 compared to the first quarter of 2015, slightly higher than the 6.1% sales growth in the quarter. The delta between inventory and sales growth is primarily made up of the cold weather merchandize that was packed away for the 2016 winter season.”
An increasing trend among brands and retailer is to not automatically close out product that didn’t sell during the season. If it didn’t sell because it’s demonstrably just plain sucky product, that’s one thing. But when you’ve got successful product that perhaps you bought a bit too much of and that isn’t projected to change much if at all, there’s absolutely no reason you can’t put it in the warehouse and sell it next year.
Well, there might be one reason. If you’re balance sheet is so weak that you need to sell that inventory for cash at whatever price, then perhaps you don’t have the financial option of holding the merchandise. So once again, the condition of your balance sheet matters. The artificially low cost of capital these days doesn’t hurt either, as the carrying cost is so low.
Dick’s balance sheet is a big reason the “mess,” though short term inconvenient for them, will ultimately leave the company better positioned. Ed notes, “This environment will likely put short-term pressure on our business. There are over 200 stores within five miles of a DICK’s store that are closing and liquidating and over 350 stores within 10 miles of DICK’s location. Once this consolidation works its way through the system, we’re poised to pick-up significant market share.” He estimates that 20 million square feet of retail space in sporting goods is going away just from The Sports Authority and Sports Chalet closings.
Obviously, all those stores with all the merchandise being liquidated will put some pressure on Dick’s sales and margins. CFO Teri List-Stoll says, “Our short term results could vary wildly.”
The Sports Authority inventory being liquidated, according to one of the analysts, is $400 million at cost. CEO Stack reminds us that it’s a lot more than that at retail (he’s right, but I’m not sure why that correction is relevant). He also says that the liquidators will probably bring in additional merchandise they have available. I have no idea how to related that number to the impact on Dick’s, but there has to be some given the proximity of Dick’s stores to The Sports Authority location.
On the other hand, Dick’s tells us that they’ve gotten calls from vendors offering product at discounts they couldn’t expect under different circumstances. CEO Stack says, “…we do think that that will help alleviate some of the margin rate pressure. But it’s not significant.”
I don’t know how it will help if it’s not significant. However, he notes that’s just started to happen, and perhaps it will turn out to be more a benefit as time passes. Anyway, it’s just another possible benefit of a stronger balance sheet. The sellers need to move their inventory and you’ve got the cash to buy it.
Meanwhile, those 20 million square feet (more coming?) of real estate probably means some opportunities to get space cheaper and to renegotiate existing leases as they come up for renewal. As one of the analysts asks, “Since you are one of the very few retailers left that will continue to open large stores, have you already begun to see the benefits of lower rent costs in your current discussions with landlords…?”
CEO Stack’s response is around being disciplined and keeping their powder dry. Addressing the real estate issue later in the conference call he says, “We don’t feel any pressure or any hurry to take this real-estate from Sports Authority because what’s going on in the marketplace, there will be other real-estate available. So we’re exercising our patience. We’re being very diligent in our real-estate process. And as we go on, we’ll understand where that balance is. And we feel right now we’re in a pretty good spot.”
I’d say they are. Another benefit of a strong balance sheet.
Dick’s doesn’t think the consolidation is over. As Ed puts it, “I think there will be more consolidation. Do we see weaknesses in some of these other competitors? Sure. I don’t think it would be appropriate for me to call it out here. But yes, I think there is. And I think there will be more consolidation going forward.”
As I read between the lines, they seem a little smug. Maybe they’ve got reason to be. But I’ve learned that just because executives make a pronouncement in a conference call doesn’t mean it will turn out to be that way. They acknowledge the uncertainty going forward that we’re all dealing with. Knowing what you don’t know is always a good place to start.