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Sports Authority Wrestles With Bankruptcy

Sports Authority stunned the sporting goods retail industry when it filed for Chapter 11 bankruptcy on March 2.

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Sports Authority stunned the sporting goods retail industry when it filed for Chapter 11 bankruptcy on March 2.  At that time, the company said it planned to slim down and continue operating after exiting Chapter 11.

Founded by Nathan Gart in 1928, the company’s first store was named Gart Sports. Its modest location in Denver, Colorado debuted with $50 in fishing rod samples. It changed its name to Sports Authority in 1987. The company grew over the years by merging with Sportmart in 1998 and Oshman’s Sporting Goods in 2001. It is currently owned by the Los Angeles-based private equity firm Leonard Green & Partners.

The company eventually had hundreds of stores all over the country and 14,500 full- and part-time employees. With those formidable numbers, it’s tragic that the company now finds itself painted into a corner, so to speak.

At the time that Sports Authority filed for bankruptcy, Nathan Bomey of USA Today had reported that “it currently operates 463 stores in 41 states and Puerto Rico.” Bomey added that “the company’s top 10 unsecured creditors include Nike, which is owed $47.9 million, and Under Armour, which is owed $23.2 million.”

Foul Factors

An initial report by CNNMoney’s Chris Isidore asserted that “when the company was bought by a hedge fund 10 years ago, it was the largest sporting goods retailer in the country.” The report went on to say, “But it has struggled with the debt load associated with a leveraged buyout a decade ago. It has been overtaken by Dick’s Sporting Goods, which has grown by providing a more high end shopping experience.”

A Retail Dive feature by Lara Ewen probed the cause of Sports Authority’s bankruptcy. The company’s main problem was its debt. The feature quoted Reshmi Basu — an associate editor at Debtwire, an intelligence service that researches and reports on corporate debt situations — who said, “When we picked up coverage on Sports Authority in May 2015, earnings weren’t that great. The company’s revenues were flat from 2013 to 2014, but also, they were trying to invest heavily in e-commerce and store remodels. It’s a very over-leveraged company, and it had $1 billion in debt coming due over the next two years.”

In the face of its financial obligations, Sports Authority’s seeming lack of a more proactive marketing strategy contributed to its losses.

Peterson added that “big box stores such as Wal-Mart and Target, as well as Dick’s and brands such as Nike (which has its own stores) also “pushed Sports Authority towards irrelevancy.”

Sports Authority also failed to establish an online presence. As Peterson pointed out, “From a more tactical level, Sports Authority moved too slowly to compensate for the mass consumer movement to shopping online, and Amazon in particular. [If you] still have over 450 stores in dire need of a refresh in this day and age, you’d better have a great private label brand, wonderful sales people, and a great store environment. Sports Authority has none of that.”

[buffet_recommended]

Damage Control

Sports Authority has set an asset auction on May 16. That day, it also will auction 140 store leases.

According to Canaccord Genuity analyst Camilo Lyon, Sports Authority’s loss could be Dick’s Sporting Goods’ gain. “Dick’s, the nation’s largest sporting goods retailer, is the most likely bidder for the majority of Sports Authority store leases that could go to auction next week,” reported Alicia Wallace in The Denver Post.

Wallace noted: “The base-case scenario has publicly traded Dick’s scooping up 80 Sports Authority leases. The best-case scenario? 180 stores.”

“Academy Sports is the next-biggest sports retailer after Dick’s, and may also bid on some of the Sports Authority stores,” reported Laura Northrup in the Consumerist. Academy Sports could go for the stores that are in the Midwest and the South.

Affected Entities

In their Bloomberg article, “Sports Authority bankruptcy disrupts sporting goods industry,” Lauren Coleman-Lochner and Matthew Townsend assert that Sports Authority’s bankruptcy has broad repercussions on its suppliers, as well.

Among those suppliers is Performance Sports Group Ltd. — the maker of baseball bats and hockey gear — which “wrote down anticipated sales that it would have gotten from Sports Authority.” The company slashed its outlook, which sent its stock down 66 percent on May 10.

The closure of Sports Authority stores would also hurt the sales of its competitor, Dick’s. “In the short term, the Sports Authority closings will actually hurt nearby Dick’s stores. That’s because liquidation sales will flood the market with discounted merchandise,” explained Coleman-Lochner and Townsend.

However, Dick’s is optimistic that it would start to benefit in the second half of 2016 and well into 2017.

Liquidation Scenario

Then again, as Northup indicated, “It’s possible that a liquidator could win some or all of the stores, too, which would mean they would simply shut down.”

Another Bloomberg report has cited an e-mailed statement from Sports Authority, which said, “We have received expressions of interest from a number of potential buyers. We are optimistic about the results of the M&A (merger and acquisition) process, which runs through the end of May.”

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Automobiles

Hertz Pulls $500 Million Offering After SEC Review

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Hertz Pulls $500 Million Offering After SEC Review

Fortunately, Hertz won’t be able to sell worthless shares in exchange for real money.

The financially – and apparently morally – bankrupt company ended its bid to sell up to $500 million in new shares that it acknowledged likely didn’t amount to much.

In a regulatory filing yesterday, the company said that the stock offering “promptly” became “suspended pending further understanding of the nature and timing of the Staff’s review.”

In the filing, Hertz said that it had been in “regular contact” with the Securities and Exchange Commission all week. This came after the agency told the company on Monday that it planned to review the stock sale.

SEC Chairman Jay Clayton said Wednesday that his agency had concerns about Hertz’s plan to sell stock while the company is in the middle of bankruptcy proceedings.

“In this particular situation we have let the company know that we have comments on their disclosure. In most cases when you let a company know that the SEC has comments on their disclosure they do not go forward until those comments are resolved,” Clayton said during an appearance on CNBC.

The Process

When companies want to sell a security, in this case more shares, they submit a filing with the SEC. The agency will review the filing. It will also send comments back to the company consistently. In its feedback, it will ask the company to improve the disclosure or any irregularities in the filing. During his CNBC appearance, Clayton did not specifically mention the issues the SEC had with the Hertz filing.

“We at the SEC, were are trying to carry out our responsibility in situations like this as best we can and I expect the other professionals around the situation to carry out their responsibilities as best they can,” Clayton added.

Those disclosures filed by Hertz said “Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels.”

In plain talk, that means the new shares are worthless.

DIP Financing

Hertz shares stopped trading for several hours yesterday before resuming again just before 3:30pm ET. Shares were up double-digits before closing the day with a modest 2.6% gain.

The company, which filed for bankruptcy on May 22, would traditionally get debtor-in-possession (DIP) financing. This would allow it to remain in business as the company went through bankruptcy proceedings.

However, after Hertz filed for bankruptcy, shares traded as low as $0.40 on May 26 before surging to as high as $6.25 on June 8.

Instead of taking the DIP loan that would need to be paid back, the company instead wanted to sell shares. I then planned to use the cash proceeds to pay off creditors. Hertz had hoped to sell up to $1 billion in shares, before trimming the proposed offering down to $500 million.

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Bankruptcy

Kenmore Deal a Short Term Solution for Sears… Simply Delaying the Inevitable

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Sears is one of the most iconic retailers in U.S. history. The company started the mail order catalog in 1888, and grew its brand of department stores from there as it became one of the driving forces behind malls. But lately, times have been tough for Sears. The once proud retail giant has shuttered Sears and KMart stores left and right as it tries to avoid bankruptcy. Now the company is doing something it’s never done before, turning to online distribution to turn things around. But is it too little too late?

Can the Deal Sears Struck with Amazon Right the Ship?

While Sears has been struggling to adapt to modern day retail trends, the company has been bailed out on several occasions by cash injections from CEO Eddie Lampert, who has given personal loans as well as investments from a hedge fund he manages. However, a cash injection isn’t enough if nothing is changing. So Sears is working to change. The next step? Selling its proprietary Kenmore brand through Amazon.

While the deal makes a ton of sense for Amazon, it’s a desperation play by Sears. Amazon gets to offer a leading brand on a pretty exclusive basis. Other than Sears itself, consumers won’t have any other options to purchase a Kenmore appliance. As the world’s leading online retailer, getting a leading brand no one else has just adds fuel to the fire. Smart play by Amazon. But for Sears?

Sears might see a small bump in sales from this deal, but the truth is, those sales won’t be enough to offset the trend of declining sales Sears has been experiencing for years now. Unless Sears has a bigger picture plan for expanding distribution of its products and brands, this changes nothing for the struggling retailer. That’s best case scenario. Worst case scenario? People who were willing to go to Sears specifically for its Kenmore brands now have one less reason to visit the store, or even the online store.

Clearly Sears is struggling. But they do have some valuable name brands. The best of those was Black & Decker, which sold this year for $900 million, down from the original $2.2 billion that was being considered. With Kenmore being another leading brand name, why isn’t Sears trying to sell the Kenmore brand? Most likely, no one wants it. Which is just another in a growing list of bad signs for Sears.

Watch this video from iBankCoin.com about the Amazon Sears Agreement to sell appliances online:

Ignore the hype around the deal. Expect shares of Sears Holding Corp. (SHLD) to continue DOWN.

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This publication provides general information about certain subjects, and should not be construed or taken as advice (legal, financial, investment, tax, or otherwise). Do not construe or take any information in this publication as a solicitation, offer, opinion, or recommendation to buy or sell any securities, bonds, or other financial instruments or to provide any legal, financial, investment, tax, or other advice or service about the suitability or profitability of any financial instruments or investments.

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Bankruptcy

Puerto Rico’s Bankruptcy Pits Wall Street Vs. the U.S. Government

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Puerto Rico is out of money. And not just out of money, but in serious debt, owing $73 billion to many Wall Street companies after years of investment in the territory by Wall Street. What happens when a territory defaults? It’s not a country that can give away its assets — Puerto Rico is a U.S. territory and thus falls under U.S. law. And as the U.S. government is wont to do when big businesses are facing trouble, Congress is bailing out Puerto Rico with a special type of bankruptcy protection. Who is most affected by the news?

What’s Next for Puerto Rico?

How does a U.S. territory end up pitted against one of the world’s biggest financial institution? In the case of Puerto Rico, through bonds. For years, Puerto Rico offered high yield bonds which brought in hedge fund and mutual fund managers who viewed the territory as a safe bet due to tourism and being part of the U.S. economy.

Puerto Rican Flag | Puerto Rico's Bankruptcy Pits Wall Street Vs. the U.S. Government

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So what happened? Well, investors assumed that the island’s financial difficulties and economic issues would be solved at some point. Unfortunately, that’s not the case. Now, those bonds have come due, to the amount of $73 billion, and Puerto Rico just doesn’t have the money to pay up. To make it relative, the city of Detroit, which is in serious financial trouble, owes about $18 billion. Out of that $73 billion debt, about $12 billion is insured, meaning that debt falls on bond insurers who backed Puerto Rico bonds. Puerto Rico then has to pay the insurance companies back, adding them to the list of debtors waiting to be paid.

Wall Street Bull | Puerto Rico's Bankruptcy Pits Wall Street Vs. the U.S. Government

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Who are these other companies? Big Wall Street names including:

OppenheimerFunds
Franklin Templeton Investments
Aurelius Capital Management

Watch this video from Wochit News about Puerto Rico’s bankruptcy:

What’s next? Puerto Rico goes into Title III court-supervised negotiations with the hedge funds to try and settle. But the fact is, that’s not going to amount to much. The government will push for debt restructuring and spending cuts, but the island is poorer than ever, with a dwindling population. The island will settle with Wall Street companies, who will then collect from the U.S. government and write down the rest for huge tax breaks. Puerto Rico will have to tighten its belt, but will survive with the help of the U.S. government’s protection and bailout.

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The statements, views, and opinions of any article, contribution, editorial, or advertisement in this publication are not necessarily those of The Capitalist or its editorial staff, and are not considered an endorsement, sponsorship, or recommendation of any referenced product, service, issuer, or groups of issuers.

This publication provides general information about certain subjects, and should not be construed or taken as advice (legal, financial, investment, tax, or otherwise). Do not construe or take any information in this publication as a solicitation, offer, opinion, or recommendation to buy or sell any securities, bonds, or other financial instruments or to provide any legal, financial, investment, tax, or other advice or service about the suitability or profitability of any financial instruments or investments.

The Capitalist disclaims any liability for the accuracy of or your reliance on any statements, views, opinions, or information in this publication.


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