Sports Direct International (SDI), the large-scale European retailer that owns Field & Trek along with the Karrimor and Gelert brands, has obtained court approval to take over assets of Eastern Outfitters, a U.S. outdoor and sports retailer that filed for Chapter 11 bankruptcy protection. The U.S. retailer previously had 86 stores trading as Eastern Mountain Sports and Bob's stores, but the assets to be acquired by SDI comprise only about 50 outlets.
SDI said in a statement last month that the cost of the acquisition amounted to $101 million in cash. All of this amount has either been advanced by SDI or been used by the British company since Jan. 27 for the acquisition of Eastern Outfitters' debt. The cash was advanced by way of debtor-in-possession and other loans to Eastern Outfitters, before and during the Chapter 11 process. The acquisition of assets was approved by the Delaware Bankruptcy Court on April 19.
Eastern Mountain Sports is a specialist outdoor retailer, while Bob's is a cheaper sports retailing concept. It remains to be seen to what extent Sports Direct intends to alter the two concepts and bring in its own sports and outdoor brands. SDI said that the acquisition, expected to be completed in the first half of May, will provide it with a physical presence in the U.S. sports retail market, while giving it a platform to grow its U.S. online sales. In the financial period to Jan. 28, 2017, the entities being acquired incurred a pre-tax net operating loss of $26 million, and their gross assets at the end of the period were valued at $126 million.
The deal was met with mixed reactions. Sports Direct has been under scrutiny in the last year due to allegations about working conditions and concerns among investors about corporate governance at the company, as well as weaker results in its last reported fiscal year.
The commotion led to reforms and the appointment of Mike Ashley, SDI's majority shareholder, as the group's chief executive after the resignation of David Forsey. It also led to a sharper focus on upgrading Sports Direct's U.K. sports retail business. In this context, Jonathan Pritchard from Peel Hunt reportedly described the U.S. purchase as a distraction, which also didn't come particularly cheap.
Other analysts have pointed out that British retailers have often under-estimated the complexities of retailing in the U.S. market. At least one of SDI's foreign acquisitions has turned out to be costly, as its takeover of Sport Eybl and Sport Experts in Austria has led to multiple store closures and an underlying operating loss for SDI's international retail business in the first half of its current fiscal year, ended last Oct. 23.
On the other hand, SDI is evidently taking advantage of a major disruption in the U.S. sporting goods and outdoor retail sector, due apparently in large part to declining traffic in brick-and-mortar stores and strong competition from online retailers. The latest casualty in the American outdoor retail market is Gander Mountain, which has decided to close all its 126 stores after 57 years in operation, putting their inventories in liquidation, after filing for bankruptcy in March. At least 70 locations are going to be reopened and taken over by Camping World Holdings, whose 120 super-centers across the U.S. specialize in recreational vehicles, parts and accessories. We cannot report many other details because of an agreement with Sporting Goods Intelligence in the U.S., from which we license the European edition of SGI, that prevents us from reporting about U.S. sporting goods and outdoor retailers.
Versa Capital Management bought Eastern Outfitters in previous bankruptcy proceedings last year. As described earlier in The Compass, SDI agreed in principle with creditors to purchase Eastern Outfitters instead of going through a bankruptcy auction. SDI will be responsible for completing the sales at 27 Eastern Mountain Sports stores and 21 Bob's stores that are to be closed. When it filed for bankruptcy in February, Eastern Outfitters had 51 Eastern Mountain Sports stores and 35 Bob's Stores outlets.
SDI has been busy trying to get a foothold in the U.S. retail market, or at least to take advantage of the predicament of several large-scale local protagonists to buy assets. Last year SDI was one of the parties that studied a bid for part of the assets of The Sports Authority, which has been partly taken over by Dick's Sporting Goods.
SDI has a track record of taking financial stakes in other retail companies in the U.K. as well, not necessarily with the intention of buying them outright and managing them. Retailers in which it has invested over the years include Debenhams, JD Sports Fashion and Findel, as well as French Connection. Sports Direct has just raised its stake in Denehams, the British department store chain, from 16.0 percent to 17.08 percent. The move can be regarded as more than just a financial investment as Sports Direct has concessions in several Debenhams stores in the U.K.
Meanwhile, SDI has reported in a regulatory filing that it has amassed a stake of 7.87 percent in Finish Line, one of the leading players in the uncertain U.S. sports retail market. The filing with the U.S. regulatory authorities states that the purpose is investment, but that the shareholder could make suggestions with respect to changes in assets, business operations, capitalization or corporate structure. SDI purchased its shares in Finish Line from March 30 to April 13.
Finish Line is a chain of about 950 sporting goods stores, most of them in U.S. malls and in Macy's department stores, which exposes it to the impact of falling traffic in such shopping destinations. After the departure of Finish Line's previous chief executive last year, the incumbent has been striving to restructure the business. This led recently to the divestment of Jack Rabbit, a chain of specialty running stores.
Sports Direct had 454 sports stores in the U.K. in October, generating a turnover £1,111 million (€1,315.7m-$1,438.3m) for the first half of the fiscal year, compared with 239 sports stores in other European countries (excluding Ireland and Iceland), which yielded sales of £330.2 million (€391.0m-$427.5m). The group has already moved beyond Europe with a move into Malaysia, where Sports Direct reported 23 stores in October.