Sports Authority takes 3Q hit of $55M; to close 18 units

Discount Store News, Oct 26, 1998 by Mike Troy

FORT LAUDERDALE, FLA. -- The Sports Authority's pending closure of 18 stores, the departure of three senior executives and a $55 million charge against third quarter earnings mark what the company and its investors hope is the end of a long downhill slide.

The $55 million after-tax charge against earnings includes $24 million for store closing costs, $13 million for inventory clearance and $8 million for asset impairment of six stores that will remain open.

"Although closing stores and taking these charges are difficult and painful, we wanted to effect the necessary changes now in order to position our business for greater profitability in the future," said Marty Hanaka, ceo, The Sports Authority.

The locations of the 18 stores to be closed haven't been released, and they won't close until after the holiday season.

Whatever turnaround plan is put in place, it will be executed by a new senior management team; and given their backgrounds it will certainly focus on supply chain management, adjustments to product mix and store layouts.

Hanaka joined the company earlier this year as vice chairman, although it was clear at the time he would eventually succeed company founder and chairman Jack Smith as ceo.

Hanaka, who had previously been president and coo at Staples, then brought in Miles Tedder, who had also been with Staples, as vice president of logistics.

With Hanaka poised to become ceo, TSA veteran and then president and coo Dick Lynch assured his eventual departure from the company by opposing TSA's merger with the Venator Group. Lynch took a leave of absence and subsequently resigned a month ago. His departure was followed by that of Bob Timinski, executive vice president and chief merchandising officer, and Arnold Sedel, senior vice president of stores.

Hanaka then brought in another former Staples executive, Henry Flieck, for the newly created position of executive vice president, growth and development. Flieck served as senior vice president of real estate at Staples.

The changes in management and restructuring at TSA are long overdue, as the company has been struggling for nearly two years. During the past six quarters, TSA's business has been characterized by negative same store sales, sluggish consumer demand, markdowns, sagging profits, increased expenses and an inability to execute.

During the third quarter, which ended Oct. 25, TSA estimates its same store sales will decline about 5%. And even if a $55 million charge weren't being taken, the company was forecasting a 27-cents-to-32-cents-pershare loss. Based on roughly 31.5 million shares outstanding, that equates to a $9 million third quarter loss, in addition to the $55 million charge.

During the second quarter ended July 26, same store sales declined 2.8%, inventories were up, gross margins were down and profitability suffered as net income declined 150% from $9.6 million to $3.8 million.

During the first quarter, same store sales were down 6.2%, and TSA posted a net loss of $3.7 million vs. a profit of $2.6 million during the same quarter the previous year.

Last year, same store sales declined 2.2%, and net income declined 35% from $30 million to $22.2 million.

Simply closing stores should help profits, as the company estimates the units it plans to close are producing an l8-cents-to-20-cents-per share drag on earnings.

Closing units in multistore markets also signals a reversal in strategy for TSA. Under the direction of Smith, cannibalization of stores was so much a part of the company s strategy that quarterly earnings announcements included two sets of comparable store sales figures. One set of numbers was calculated using the method employed by most retailers. A second set was adjusted to exclude those stores considered to be cannibalized by new stores.

TSA was sometimes criticized about the manner in which it reported same store sales. For Smith, though, the goal was to gain market share, and he disdained analysts for their myopic focus on comps. Smith believed it was better to have two stores in a market generating sales of $20 million than one store producing $12 million.

In taking the third quarter charge, shuffling management and restructuring its business, TSA is essentially following the advice of Merrill Lynch that was provided during the review process of its failed merger with Venator.

Merrill Lynch's analysis of TSA concluded that if the company were to remain independent, "it would need to improve certain practices and procedures and to take steps to restructure its business, which could include store closures, product line changes and store format changes, thus resulting in restructuring charges."