Sports Authority Inc. learned the hard way that buyout debt can be a drag.
Once the biggest U.S. sporting-goods retailer, the company found it difficult to be nimble enough to stay ahead of rivals. In retailing, consumer trends shift quickly, stores constantly need upgrades and a surprise like a winter storm can make it necessary to act fast to salvage a big shopping weekend. But Sports Authority was loaded with at least $643 million in debt, a hangover from the $1.4 billion leveraged buyout in 2006 by investors led by Leonard Green & Partners.
Sports Authority’s bankruptcy plan includes closing 140 of its 463 stores, leaving workers jobless and shopping centers across America anchor-less.
Other retailers filing recently for bankruptcy include Deb Shops Inc., a 2007 buyout by Lee Equity Partners, and Dots Stores Inc., a 2011 purchase by Irving Place Capital. Also headed for the debt wall are Claire’s Stores Inc., bought by Apollo Global Management in 2007, and Gymboree Corp., a 2010 Bain Capital Partners acquisition.
Such struggles make it less likely for private equity firms to target retail chains in the future, said Michael Appel, founder of Appel Associates, a consulting firm that works with retailers.
“It’s just not an industry that can tolerate a lot of leverage,” Appel said. Even without owing a ton of money, retailers can be slowed by fixed costs such as rent, salaries and inventory, he said.
A representative for the restructuring firm Gordon Brothers Group declined to comment for Dots Stores. So did a Sports Authority representative. Spokesmen for Gymboree, Deb Shops and Claire’s didn’t respond to requests for comment.
The obligations loaded on these companies aren’t the sole cause of their struggles. To Dina El Mahdy, an accounting professor at Morgan State University in Baltimore, they’re not a reason at all. Poor management and lender monitoring, not debt, drive companies into distress, she said. Leveraged buyouts provide a cheaper cost of capital and add value, she said.
“You can’t say high leverage ends up with high default,” she said. “There are many, many things in between.”