Sports Authority's post-bankruptcy plan won't work

The chain appears to be shutting down perfectly viable stores because of a need to cut costs.

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Following last week's Chapter 11 bankruptcy filings from Sports Authority, it's easy to play Monday morning quarterback and criticize how Sports Authority handled its business. The path to bankruptcy court can be complicated. But a key concern now is not what led this chain to bankruptcy court as much as what its plan is for going forward. And it appears that its post-bankruptcy plan of attack suffers from the same misguided strategy that got it to bankruptcy court.

This gets us back into the issue of how a retailer with a physical store history becomes a chain equally comfortable in mobile, desktop Web, social media and other aspects of a merged channel strategy. And yes, it's not like other sports retailers are mastering today's world of adapting to this world that much better than Sports Authority. Other retailers -- such as Nordstrom -- are making these changes, but are not wild about the costs involved. And other chains -- such as Walmart -- go to the other extreme, seeing all efforts only having the purpose of driving shoppers in-store.

On March 2, Sports Authority CEO Michael Foss summed up the chain's plans post-bankruptcy: "Due to the changing retail environment, we have a long-term plan to streamline and strengthen our business so we can continue to make necessary investments in our operations, including upgrading our in-store experience and enhancing our website. As part of that plan, we have identified approximately 140 stores that we intend to close or sell in the coming months."

Let me make sure that I understand this strategy. Sports Authority has been struggling making enough sales and profits due to direct competition, primarily from Amazon.com. The sales pushed from the country's largest e-tailer have been hurting. So to combat this, you are shutting down almost one-third of your stores ("approximately 140 stores" closed versus "over 450 stores" currently open).

By the way, Debtwire puts the total current number of Sports Authority stores at 464, and adds that the chain has prepared "for the closure of up to 200 stores and two of their five distribution centers." That would put the closing number closer to 43% of stores, coupled with the loss of almost half of their DCs.

In other words, instead of leveraging the one thing you have that Amazon doesn't -- your physical stores in 45 states -- you are slashing as much as 43% of your advantage. Yeah, that will work.

To Sports Authority's credit, the CEO's statement did say that the chain planned to upgrade "our in-store experience." It's hard to analyze without knowing any specifics, but it's difficult to imagine any physical improvements that would combat having almost one-third fewer stores. The main point of a physical location is proximity to your shoppers, theoretically translating into an easy trip.

That said, there are certainly times when shutting down stores makes sense. That would be the case when the store's problem is not fixable by management. The most likely scenario? If the demographics of the community the store is in have changed and no longer house sufficient people who need a regular supply of sporting goods. When that happens, and there is an insufficient number of customers to support a store, shutdown is necessary.

But that's not the case here. Sports Authority appears to be shutting down perfectly viable stores -- plus almost half of its DCs -- because of a need to cut costs. This is the retail death spiral. By closing stores, you will force your existing customers in those communities to turn to a competitor, such as Amazon or the other remaining sporting goods chains. In short, you're strengthening the competition and turning away sales that would have otherwise been yours.

Sports Authority is buying into typical Wall Street think. You remember Wall Street traders? Those are the people who cheer and buy the stock when large companies announce layoffs or other cutbacks. We should rename the term the Wall Street Death Spiral.

When I spoke this week with Debtwire's Reshmi Basu, she said that there were many reasons for the chain's troubles, but she specifically pointed to the chain's having "invested heavily in e-commerce initiatives and store remodels -- which resulted in higher SG&A costs. But this came at the expense of the bottom line, as shipping costs related to Internet sales hurt EBITDA."

In short, Basu is arguing that these investments cost too much. But what is this based on? To conclude that something cost too much, one first needs to understand the benefits the effort delivered. E-commerce calculations that solely look at online revenue eerily miss the point. How many sales did the site (both mobile and desktop) reel in and deliver to the stores?

When it comes to sporting goods, I'll venture to say quite a few. Just as critical to factor into this equation is the reverse effect, of stores driving sales that -- perhaps due to long lines at checkout or a customer who has to leave right away for an appointment -- materialize on the site.

The bottom line here is that retail chains need to rely on all of their sales channels. And they need to understand the interconnectedness of a well-executed merged channel strategy.

Reality time. No business exists within a vacuum and financials are important. But the post-bankruptcy plan needs to be one that will work. It could be to close all non-performing stores. That makes sense. A radical move might be to become a regional chain, only existing, for example, in California or New England. But to just close a hung chunk of stores to save money and to pretend that all of your problems will magically disappear is foolish.

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