WEBVTT 00:00:00.000 --> 00:00:01.500 You know, I was driving through the suburbs the 00:00:01.500 --> 00:00:04.280 other day, just running some errands, and I passed 00:00:04.280 --> 00:00:06.480 one of those massive, sprawling strip malls, 00:00:06.480 --> 00:00:08.839 the kind that feels like it goes on for miles. 00:00:09.279 --> 00:00:12.419 And right in the middle, there was this giant, 00:00:12.539 --> 00:00:16.379 empty, concrete box. The parking lot in front 00:00:16.379 --> 00:00:18.399 of it was all cracked, weeds coming up through 00:00:18.399 --> 00:00:20.859 the asphalt. Right. But the thing that really 00:00:20.859 --> 00:00:24.140 caught my eye was the facade. You can see the... 00:00:24.809 --> 00:00:27.429 ghost label the ghostly yeah you know what i 00:00:27.429 --> 00:00:30.149 mean the sun had bleached the paint on the building 00:00:30.149 --> 00:00:32.810 for decades except for the spots where the giant 00:00:32.810 --> 00:00:35.250 red letters used to be oh okay i'm with you so 00:00:35.250 --> 00:00:37.409 even though the sign was totally gone the outline 00:00:37.409 --> 00:00:40.950 was just burned into the wall and i knew exactly 00:00:40.950 --> 00:00:42.929 what it was immediately it was the sports authority 00:00:42.929 --> 00:00:47.890 that is a very specific and a very american kind 00:00:47.890 --> 00:00:50.429 of archaeology isn't it it really is and it hit 00:00:50.429 --> 00:00:54.159 me this wasn't just a store For a solid 25 years, 00:00:54.380 --> 00:00:56.780 that shape on the wall represented the absolute 00:00:56.780 --> 00:00:58.640 center of the universe for anyone who played 00:00:58.640 --> 00:01:01.659 a sport. Yeah, it was ubiquitous. Totally. If 00:01:01.659 --> 00:01:03.240 you needed a baseball glove, you went there. 00:01:03.359 --> 00:01:05.260 If you needed running shoes, you went there. 00:01:05.359 --> 00:01:07.819 It was plastered on the Denver Broncos stadium, 00:01:07.920 --> 00:01:10.400 for crying out loud. It was an empire. An empire. 00:01:10.519 --> 00:01:13.590 And now it's just a stain on a stucco wall. It's 00:01:13.590 --> 00:01:16.609 a haunting image, but it's also the perfect starting 00:01:16.609 --> 00:01:18.969 point for our deep dive today. Right. Because 00:01:18.969 --> 00:01:21.390 the story of Sports Authority isn't just about 00:01:21.390 --> 00:01:24.069 a store closing down. I mean, if we really dig 00:01:24.069 --> 00:01:26.390 into the source material, the financial filings, 00:01:26.390 --> 00:01:28.810 the history of all the mergers, the bankruptcy 00:01:28.810 --> 00:01:32.379 court documents. What we find is a perfect case 00:01:32.379 --> 00:01:35.540 study for the entire life cycle of American retail. 00:01:35.819 --> 00:01:38.120 It's like a timeline of how business has changed 00:01:38.120 --> 00:01:40.780 over the last century. Precisely. It starts with 00:01:40.780 --> 00:01:43.319 the American dream phase, you know, a scrappy 00:01:43.319 --> 00:01:46.219 founder back in the 1920s. Okay. It moves into 00:01:46.219 --> 00:01:49.219 the corporate consolidation of the 80s and 90s. 00:01:49.219 --> 00:01:51.540 Then we get into the financial engineering era 00:01:51.540 --> 00:01:54.780 of the 2000s, which is where things get really 00:01:54.780 --> 00:01:57.359 dark. And that leads to the end. And finally, 00:01:57.519 --> 00:02:01.480 the retail apocalypse. If you understand why 00:02:01.480 --> 00:02:04.040 sports authority died, you understand exactly 00:02:04.040 --> 00:02:06.579 how the modern economy works and more importantly, 00:02:06.760 --> 00:02:09.219 how it doesn't work. Well, I want to understand. 00:02:09.419 --> 00:02:11.639 Because looking at the outline, the scale of 00:02:11.639 --> 00:02:13.979 this collapse was just massive. We're talking 00:02:13.979 --> 00:02:16.919 about billions of dollars that just vaporized. 00:02:17.000 --> 00:02:19.099 Gone. But before we get to all that destruction, 00:02:19.419 --> 00:02:22.099 we have to start with the creation. And frankly, 00:02:22.240 --> 00:02:24.699 the origin story is shocking. Considering how 00:02:24.699 --> 00:02:27.139 corporate and, you know, soulless it eventually 00:02:27.139 --> 00:02:30.300 became. It is shocking because before the private 00:02:30.300 --> 00:02:32.919 equity firms and the skyscrapers, it was just 00:02:32.919 --> 00:02:35.539 a guy named Nathan in Denver, Colorado. Nathan 00:02:35.539 --> 00:02:39.979 Gart. Nathan Gart. The year is 1928. You have 00:02:39.979 --> 00:02:41.979 to set the scene. This is the tail end of the 00:02:41.979 --> 00:02:45.080 roaring 20s. The stock market is booming. Speculation 00:02:45.080 --> 00:02:47.400 is wild. Right. The party before the crash. Exactly. 00:02:47.740 --> 00:02:50.280 But Nathan isn't a Wall Street guy. He isn't 00:02:50.280 --> 00:02:52.879 some kind of tycoon. He is a newspaper carrier 00:02:52.879 --> 00:02:55.400 for the Denver Post. A paper boy. I love that. 00:02:55.460 --> 00:02:57.340 He's literally out there hustling on the street 00:02:57.340 --> 00:03:00.289 corner. He is. And the legend, which is really 00:03:00.289 --> 00:03:02.550 well documented in the company's own historical 00:03:02.550 --> 00:03:05.569 archives, is that he started the company, Gart 00:03:05.569 --> 00:03:09.469 Brothers, with exactly $50 in his pocket. $50. 00:03:09.509 --> 00:03:11.810 Okay. We always have to do the inflation check 00:03:11.810 --> 00:03:15.189 because $50 back then is not $50 today. I ran 00:03:15.189 --> 00:03:19.250 the numbers before we started. In 1928, 50 bucks 00:03:19.250 --> 00:03:22.729 has the buying power of roughly $916 in 2024. 00:03:23.129 --> 00:03:26.189 Okay. So let's pause on that. 900 bucks. Yeah. 00:03:26.650 --> 00:03:29.530 That is not start a national empire money. That's 00:03:29.530 --> 00:03:33.250 buy a decent laptop money. It's buy a used couch 00:03:33.250 --> 00:03:36.090 off Facebook marketplace money. Right. It really 00:03:36.090 --> 00:03:38.530 emphasizes just how bootstrapped this operation 00:03:38.530 --> 00:03:41.370 was. He didn't have angel investors. He didn't 00:03:41.370 --> 00:03:43.229 have a line of credit from Chase Bank. He had 00:03:43.229 --> 00:03:45.469 his savings from throwing newspapers. So what 00:03:45.469 --> 00:03:47.610 does he do with his 900 bucks? Does he rent a 00:03:47.610 --> 00:03:49.770 storefront? Put a down payment on a little shop? 00:03:50.270 --> 00:03:52.629 No, he can't afford a storefront yet. Not even 00:03:52.629 --> 00:03:55.550 close. He invests the entire $50 into samples. 00:03:55.729 --> 00:03:57.949 Samples of what? Specifically, fishing rod samples. 00:03:58.210 --> 00:04:01.080 Fishing rods. So that's the seed. The whole billion 00:04:01.080 --> 00:04:03.379 dollar empire started with fishing rods. That 00:04:03.379 --> 00:04:05.379 was the seed. You have to remember, Colorado 00:04:05.379 --> 00:04:08.400 in the 1920s was really establishing itself as 00:04:08.400 --> 00:04:11.560 this outdoor playground. The Rockies were right 00:04:11.560 --> 00:04:14.080 there. People were fishing, hunting, hiking. 00:04:14.599 --> 00:04:17.540 Nathan Gart saw that the leisure economy, even 00:04:17.540 --> 00:04:19.040 though they didn't call it that yet, was the 00:04:19.040 --> 00:04:21.639 future. So he starts selling these rods, probably 00:04:21.639 --> 00:04:23.800 leveraging his contacts from his paper route. 00:04:23.959 --> 00:04:26.259 It's the ultimate side hustle. It was. And from 00:04:26.259 --> 00:04:29.550 that tiny, tiny seed. Gart Brothers, or Gart 00:04:29.550 --> 00:04:32.870 Bros, as it became known, starts to grow. But 00:04:32.870 --> 00:04:35.350 it grows the old -fashioned way. Organically. 00:04:35.550 --> 00:04:38.250 Organically. Slowly. They survived the Great 00:04:38.250 --> 00:04:40.470 Depression, which is frankly a miracle for a 00:04:40.470 --> 00:04:42.850 company selling what are essentially luxury items 00:04:42.850 --> 00:04:44.769 like fishing poles. Absolutely. They survived 00:04:44.769 --> 00:04:47.509 World War II, and by the time the post -war boom 00:04:47.509 --> 00:04:50.930 of the 1950s hits, Gart Bros is a Denver institution. 00:04:51.269 --> 00:04:55.439 This is the era of the regional powerhouse. I 00:04:55.439 --> 00:04:57.040 feel like we don't have these anymore. Everything 00:04:57.040 --> 00:04:59.779 is national or global now. But back then, every 00:04:59.779 --> 00:05:03.360 big city had their store. Exactly. If you were 00:05:03.360 --> 00:05:05.240 in Chicago, maybe you went to a different local 00:05:05.240 --> 00:05:07.079 chain. But if you were in the Rocky Mountains, 00:05:07.319 --> 00:05:09.699 you went to Gart's. It was part of the local 00:05:09.699 --> 00:05:12.939 identity. It meant something. It did. And they 00:05:12.939 --> 00:05:16.339 cemented that identity in 1971 with a move that 00:05:16.339 --> 00:05:18.939 I think is one of the most brilliant. real estate 00:05:18.939 --> 00:05:20.980 decisions and retail history. We're talking about 00:05:20.980 --> 00:05:23.699 the Sports Castle. The Sports Castle. Just the 00:05:23.699 --> 00:05:26.199 name tells you everything you need to know, doesn't 00:05:26.199 --> 00:05:28.660 it? It's epic. I looked up photos of this place. 00:05:28.680 --> 00:05:30.519 It's incredible. It doesn't look like a store. 00:05:30.620 --> 00:05:32.160 It looks like some kind of government building 00:05:32.160 --> 00:05:35.759 or a museum. It's grand. It was located at 10th 00:05:35.759 --> 00:05:38.240 Avenue and Broadway in Denver, but they didn't 00:05:38.240 --> 00:05:40.379 build it from scratch. They took over a building 00:05:40.379 --> 00:05:43.220 that had been a Chrysler automobile dealership. 00:05:43.449 --> 00:05:46.949 in the 1920s an auto dealership that's an odd 00:05:46.949 --> 00:05:49.470 choice well think about the architecture of a 00:05:49.470 --> 00:05:52.430 1920s dealership it wasn't a parking lot with 00:05:52.430 --> 00:05:55.600 a trailer right It was a palace for the automobile. 00:05:55.899 --> 00:05:58.980 Sure. High ceilings, big windows, stained glass, 00:05:59.259 --> 00:06:02.040 ornate detailing. And crucially, it had these 00:06:02.040 --> 00:06:04.839 massive internal ramps so they could drive the 00:06:04.839 --> 00:06:07.459 cars from the showroom floor up to the service 00:06:07.459 --> 00:06:10.000 levels. And Gart Bros kept the ramps. I kept 00:06:10.000 --> 00:06:12.220 everything. Imagine walking into a sporting goods 00:06:12.220 --> 00:06:14.199 store and instead of taking an escalator, you're 00:06:14.199 --> 00:06:17.060 walking up this wide concrete ramp that was designed 00:06:17.060 --> 00:06:19.660 for a Model T. Wow. They filled the different 00:06:19.660 --> 00:06:22.220 levels with different worlds. One floor was just 00:06:22.220 --> 00:06:24.660 for tennis. Another was all skiing. Another was 00:06:24.660 --> 00:06:27.100 camping. So it sounds like an experience. It's 00:06:27.100 --> 00:06:29.360 not just shopping. That's the key word, experience. 00:06:29.500 --> 00:06:32.259 We talk about experiential retail today, like 00:06:32.259 --> 00:06:35.240 the Apple Store, those massive base pro shops 00:06:35.240 --> 00:06:38.079 with the aquariums inside, as if it's some new 00:06:38.079 --> 00:06:41.000 invention to fight Amazon. Right. Gart was doing 00:06:41.000 --> 00:06:43.600 this in 1971. You were doing it before the internet 00:06:43.600 --> 00:06:46.079 even existed. Exactly. You didn't just go to 00:06:46.079 --> 00:06:48.379 the sports castle to buy a tennis racket. You 00:06:48.379 --> 00:06:50.680 went to hang out. You went to see the new gear. 00:06:50.939 --> 00:06:53.540 It became a destination. And that must have just 00:06:53.540 --> 00:06:56.480 crushed any competition. It established their 00:06:56.480 --> 00:06:59.319 physical dominance in Colorado. If you were a 00:06:59.319 --> 00:07:01.600 competitor trying to enter the Denver market 00:07:01.600 --> 00:07:04.319 in the 70s or 80s, good luck. You were fighting 00:07:04.319 --> 00:07:07.000 against a literal castle. So they owned Colorado. 00:07:07.379 --> 00:07:10.220 And then in the 80s, they start to expand a bit, 00:07:10.240 --> 00:07:13.120 right? I see here they acquired Hagen Sports 00:07:13.120 --> 00:07:17.319 LTD and Stevens Brown. Yes. The 1980s were a 00:07:17.319 --> 00:07:20.079 period of careful regional expansion. They moved 00:07:20.079 --> 00:07:22.360 into Utah. They moved deeper into the Rockies. 00:07:23.079 --> 00:07:25.740 But... And this is critical. They were still 00:07:25.740 --> 00:07:28.579 fundamentally a local company growing outward. 00:07:28.759 --> 00:07:30.639 Brick by brick. They were building brick by brick. 00:07:30.759 --> 00:07:33.060 But while Gart is carefully laying bricks in 00:07:33.060 --> 00:07:35.199 the mountains, something completely different 00:07:35.199 --> 00:07:37.660 is happening down in the swamps of Florida. The 00:07:37.660 --> 00:07:39.860 complete opposite side of the country and the 00:07:39.860 --> 00:07:41.939 complete opposite business philosophy. Enter 00:07:41.939 --> 00:07:45.529 the sports authority. Now, unlike Gart. The Sports 00:07:45.529 --> 00:07:48.209 Authority, or TSA as it was known internally, 00:07:48.449 --> 00:07:51.089 wasn't started by a paperboy. It wasn't started 00:07:51.089 --> 00:07:53.990 on a shoestring budget of 50 bucks. No. It was 00:07:53.990 --> 00:07:56.129 engineered in a boardroom. This is the corporate 00:07:56.129 --> 00:07:58.709 timeline starting. This is the other track. 1987, 00:07:59.269 --> 00:08:01.990 Fort Lauderdale, Florida. A syndicate of venture 00:08:01.990 --> 00:08:04.050 capital firms comes together. We're talking about 00:08:04.050 --> 00:08:06.529 William Blair Venture Partners, First Chicago, 00:08:06.889 --> 00:08:09.370 and a name that I think everyone knows, Bain 00:08:09.370 --> 00:08:12.500 Capital. Bain Capital. OK, that's heavy hitting. 00:08:12.759 --> 00:08:16.000 That's Mitt Romney's old firm. That's not let's 00:08:16.000 --> 00:08:18.259 sell some fishing rods. That's let's dominate 00:08:18.259 --> 00:08:21.439 an entire industry. Precisely. They teamed up 00:08:21.439 --> 00:08:24.079 with a guy named Jack A. Smith, who was a seasoned 00:08:24.079 --> 00:08:26.740 executive. He'd been the COO of Herman's World 00:08:26.740 --> 00:08:28.819 of Sporting Goods, another chain. So he knew 00:08:28.819 --> 00:08:30.759 the business. He knew the business inside and 00:08:30.759 --> 00:08:32.480 out. And they all looked at the landscape and 00:08:32.480 --> 00:08:35.500 said, there is no single national player. They're 00:08:35.500 --> 00:08:38.610 just a bunch of regional guys like Gart. Let's 00:08:38.610 --> 00:08:41.309 build a category killer. Category killer. Yeah. 00:08:41.370 --> 00:08:43.110 I hear that term thrown around in business news 00:08:43.110 --> 00:08:46.029 all the time. Usually we're referring to the 00:08:46.029 --> 00:08:49.929 90s. Toys, Aras, Home Depot, Staples, places 00:08:49.929 --> 00:08:52.909 like that. But what does it actually mean strategically? 00:08:53.250 --> 00:08:56.190 How do you kill a category? It's a strategy of 00:08:56.190 --> 00:08:59.210 overwhelming force. The traditional model was 00:08:59.210 --> 00:09:01.529 the department store. You know, a Sears or a 00:09:01.529 --> 00:09:03.350 JCPenney. They sold a little bit of everything. 00:09:03.590 --> 00:09:05.970 A few baseball bats, a few gloves. Sure. Or you 00:09:05.970 --> 00:09:07.769 had the mom and pop shop, which had... Great 00:09:07.769 --> 00:09:10.070 personal service, really high prices and very 00:09:10.070 --> 00:09:13.570 limited stock. The category killer builds a massive 00:09:13.570 --> 00:09:17.309 warehouse, 40 ,000 square feet or more, and fills 00:09:17.309 --> 00:09:19.929 it with only one thing. So if you're Sports Authority. 00:09:20.490 --> 00:09:23.549 You don't just have three baseball bats from 00:09:23.549 --> 00:09:26.330 Louisville Sucker. Yeah. You have 300. You have 00:09:26.330 --> 00:09:29.110 every brand, every weight, every material from 00:09:29.110 --> 00:09:33.230 T -ball to pro. And because you are buying in 00:09:33.230 --> 00:09:35.769 such massive volume from the manufacturers, you 00:09:35.769 --> 00:09:38.799 get much better pricing. The volume discount. 00:09:38.899 --> 00:09:41.419 Right. So you can sell that bat for cheaper than 00:09:41.419 --> 00:09:43.480 the mom and pop store can even buy it for from 00:09:43.480 --> 00:09:45.559 their distributor. You crush the small guys on 00:09:45.559 --> 00:09:47.720 price and you crush the big department stores 00:09:47.720 --> 00:09:49.980 on selection. Exactly. You become the authority. 00:09:50.179 --> 00:09:52.500 That's the brilliance of the name. Yeah. It wasn't 00:09:52.500 --> 00:09:55.019 sports warehouse or sports world. It was the 00:09:55.019 --> 00:09:57.100 sports authority. It implies that there is no 00:09:57.100 --> 00:09:59.360 other legitimate place to go. It's aggressive 00:09:59.360 --> 00:10:02.460 and it clearly works. They opened the first store 00:10:02.460 --> 00:10:05.889 in November 1987. But then, looking at the timeline, 00:10:06.169 --> 00:10:09.149 something weird happens almost immediately. 1990. 00:10:09.549 --> 00:10:11.850 The Kmart chapter. Kmart. I have to admit, when 00:10:11.850 --> 00:10:13.450 I was reviewing the notes for this, I totally 00:10:13.450 --> 00:10:15.710 forgot Kmart ever owned them. It feels like a 00:10:15.710 --> 00:10:18.090 glitch in the matrix. It does seem bizarre now, 00:10:18.269 --> 00:10:20.649 especially given that Kmart has largely vanished 00:10:20.649 --> 00:10:24.769 itself. But in 1990, Kmart was a titan. They 00:10:24.769 --> 00:10:26.690 were the second largest retailer in America, 00:10:26.809 --> 00:10:28.990 right behind Sears. And they were terrified of 00:10:28.990 --> 00:10:31.720 Walmart. Absolutely terrified. Walmart was the 00:10:31.720 --> 00:10:34.139 shark in the water. So Kmart's leadership realized 00:10:34.139 --> 00:10:36.759 their main discount stores were losing ground. 00:10:36.980 --> 00:10:39.759 Their strategy was diversification. To why buy 00:10:39.759 --> 00:10:41.740 a sporting goods store? Is it just about adding 00:10:41.740 --> 00:10:45.059 revenue? It was about buying into these new high 00:10:45.059 --> 00:10:48.840 growth category killer concepts. They bought 00:10:48.840 --> 00:10:51.700 Borders books. They bought Office Max and they 00:10:51.700 --> 00:10:53.620 bought the Sports Authority. So Kmart becomes 00:10:53.620 --> 00:10:56.340 this. Big holding company for all these different 00:10:56.340 --> 00:10:59.259 specialty giants. Exactly. And for Sports Authority, 00:10:59.559 --> 00:11:02.159 this was like winning the lottery. Kmart had 00:11:02.159 --> 00:11:04.500 incredibly deep pockets. They just poured money 00:11:04.500 --> 00:11:08.039 into TSA. Fuel for the fire. Rocket fuel. They 00:11:08.039 --> 00:11:10.440 took their existing sports giant stores, which 00:11:10.440 --> 00:11:13.360 was a Kmart -owned brand in Detroit, and converted 00:11:13.360 --> 00:11:16.519 them all to Sports Authority. They funded a blitzkrieg 00:11:16.519 --> 00:11:18.799 of expansion across the country. How fast are 00:11:18.799 --> 00:11:21.440 we talking here? In 1990, there were just a handful 00:11:21.440 --> 00:11:24.980 of stores in Florida. By 1995, just five years 00:11:24.980 --> 00:11:30.200 later, they had 136 stores in 26 states. That 00:11:30.200 --> 00:11:33.340 is insane speed. Gart took 50, 60 years to conquer 00:11:33.340 --> 00:11:35.720 the Rockies. The Sports Authority took five years 00:11:35.720 --> 00:11:37.799 to conquer half the country. That is the power 00:11:37.799 --> 00:11:40.039 of capital. But it's also the danger, right? 00:11:40.120 --> 00:11:41.759 When you grow that fast, you aren't building 00:11:41.759 --> 00:11:43.720 a culture. You aren't building deep roots in 00:11:43.720 --> 00:11:45.799 the community like Gart did. You're just planting 00:11:45.799 --> 00:11:48.840 flags on a map. You're just planting flags. And 00:11:48.840 --> 00:11:51.320 then, just as quickly as it started, the parent 00:11:51.320 --> 00:11:54.549 company gets tired of the child. 1995, what happens? 00:11:54.809 --> 00:11:57.110 Kmart started to implode. Their core business 00:11:57.110 --> 00:12:00.769 was getting hammered by Walmart and Target. They 00:12:00.769 --> 00:12:03.309 needed cash to save their own sinking ship. So 00:12:03.309 --> 00:12:05.350 they sell off the assets. They spun off the sports 00:12:05.350 --> 00:12:07.350 authority. They took it public in a big IPO. 00:12:07.669 --> 00:12:10.549 So now TSA is an independent public company again. 00:12:10.629 --> 00:12:14.029 They're huge. They're national. And they're hungry. 00:12:14.350 --> 00:12:17.190 And this brings us to the late 90s. The board 00:12:17.190 --> 00:12:19.590 is set on one side of the country. You have Gart 00:12:19.590 --> 00:12:23.190 Bros, the historic service oriented king of the 00:12:23.190 --> 00:12:26.289 West. On the other side, you have the sports 00:12:26.289 --> 00:12:29.049 authority, the corporate big box beast of the 00:12:29.049 --> 00:12:32.240 East and in the middle. a whole lot of other 00:12:32.240 --> 00:12:34.179 regional chains that are about to get eaten. 00:12:34.259 --> 00:12:37.100 This is the era of mega mergers, the consolidation 00:12:37.100 --> 00:12:40.080 phase. It is. The industry just realized there 00:12:40.080 --> 00:12:42.259 were too many players. You had Gart, you had 00:12:42.259 --> 00:12:47.460 TSA, Sportmart, Oshmans, Copelands, Models. It 00:12:47.460 --> 00:12:50.440 was way too crowded. So it was inevitable. Everyone 00:12:50.440 --> 00:12:52.360 knew that eventually there would only be two 00:12:52.360 --> 00:12:54.500 or three left standing. It's a game of musical 00:12:54.500 --> 00:12:57.200 chairs. with billions of dollars on the line. 00:12:57.299 --> 00:12:59.720 And Gart Bros decided they were not going to 00:12:59.720 --> 00:13:01.919 be the ones left without a chair. They started 00:13:01.919 --> 00:13:04.919 a very aggressive acquisition spree. Okay, let's 00:13:04.919 --> 00:13:06.440 talk about the other players, because they bring 00:13:06.440 --> 00:13:08.279 a lot of their own history to the table, too. 00:13:08.539 --> 00:13:11.639 Let's start with Sportmart. Sportmart was a major 00:13:11.639 --> 00:13:14.080 player in the Midwest, specifically out of Chicago. 00:13:14.460 --> 00:13:17.139 It was founded by the Hochberg and Cantor families. 00:13:17.220 --> 00:13:19.399 So another family business, kind of like Gart? 00:13:19.500 --> 00:13:22.950 Very similar to Gart Family Run. deep roots in 00:13:22.950 --> 00:13:25.049 their community. They grew to about 60 stores 00:13:25.049 --> 00:13:27.610 across the Midwest. I see a note here that they 00:13:27.610 --> 00:13:30.149 tried to expand to Canada at one point. Briefly, 00:13:30.149 --> 00:13:33.590 in the 90s, it's a classic example of what you 00:13:33.590 --> 00:13:36.649 might call retail hubris. They thought, hey, 00:13:36.690 --> 00:13:38.450 we know sports. Let's go north of the border. 00:13:38.710 --> 00:13:41.149 And it didn't work. International expansion is 00:13:41.149 --> 00:13:42.950 incredibly difficult. You have different supply 00:13:42.950 --> 00:13:45.710 chains, different labor laws, completely different 00:13:45.710 --> 00:13:48.570 customer tastes. It was a disaster. They failed 00:13:48.570 --> 00:13:51.279 within two years and had to pull out. Ouch. So 00:13:51.279 --> 00:13:53.480 they were treated back to the U .S., bruised, 00:13:53.600 --> 00:13:56.980 and probably short on cash. And vulnerable. In 00:13:56.980 --> 00:13:59.820 1998, Gart Bros swooped in and acquired them. 00:14:00.000 --> 00:14:02.460 Okay, so now Gart controls the West and the Midwest. 00:14:02.960 --> 00:14:05.740 Who's next on their shopping list? Oshman's Sporting 00:14:05.740 --> 00:14:08.039 Goods. Now, Oshman's, I remember, they were huge 00:14:08.039 --> 00:14:11.320 in Texas and the South. They were the Texas sporting 00:14:11.320 --> 00:14:14.340 goods store founded way, way back in 1919 by 00:14:14.340 --> 00:14:16.440 Jake Oshman in Houston. So they were actually 00:14:16.440 --> 00:14:19.700 even older than Gart. Wow. 1919? That's a century 00:14:19.700 --> 00:14:22.059 of history. And they were innovators, too. Back 00:14:22.059 --> 00:14:24.259 in the 60s and 70s, they built these massive 00:14:24.259 --> 00:14:27.379 Super Sports USA stores that had, like, batting 00:14:27.379 --> 00:14:30.179 cages and indoor ski decks inside. So they also 00:14:30.179 --> 00:14:32.299 understood the experience part of it. They absolutely 00:14:32.299 --> 00:14:34.980 did. They were another regional powerhouse with 00:14:34.980 --> 00:14:39.000 a very loyal following. But by 2001, even these 00:14:39.000 --> 00:14:40.980 giants were getting tired of fighting alone. 00:14:41.320 --> 00:14:45.240 The pressure to consolidate was immense. So Gart 00:14:45.240 --> 00:14:48.799 merged with Oshman's in 2001. Now let's pause 00:14:48.799 --> 00:14:51.679 and look at the map. Gart Sports, as Combined 00:14:51.679 --> 00:14:54.379 Company was called, is now this three -headed 00:14:54.379 --> 00:14:57.200 monster. It's Gart in the Rockies, Sport Mart 00:14:57.200 --> 00:15:00.240 in the Midwest, and Oshman's in the South. They 00:15:00.240 --> 00:15:04.139 are a massive, sprawling, regional powerhouse. 00:15:04.419 --> 00:15:06.259 But they still aren't number one nationally? 00:15:06.659 --> 00:15:09.080 No. The sports authority is still the revenue 00:15:09.080 --> 00:15:11.500 king. They own the East Coast. They have a huge 00:15:11.500 --> 00:15:13.840 presence in California. They have that national 00:15:13.840 --> 00:15:16.240 brand recognition from the Kmart days. So we 00:15:16.240 --> 00:15:18.259 have two heavyweights left in the ring. Godzilla 00:15:18.259 --> 00:15:20.700 versus King Kong. And instead of fighting to 00:15:20.700 --> 00:15:22.659 the death, which would have been bloody and expensive 00:15:22.659 --> 00:15:25.759 for both, they decided to get married. The merger 00:15:25.759 --> 00:15:27.379 of equals. That's what the press release called 00:15:27.379 --> 00:15:30.980 it. August 4, 2003. Gart Sports merges with the 00:15:30.980 --> 00:15:33.240 Sports Authority. I always find that term merger 00:15:33.240 --> 00:15:36.120 at equals a little suspicious. In business, usually 00:15:36.120 --> 00:15:38.000 someone is the windshield and someone is the 00:15:38.000 --> 00:15:41.840 bug, you know. It's rarely 50 -50. And this merger 00:15:41.840 --> 00:15:45.000 was, well, it was complicated. On paper, they 00:15:45.000 --> 00:15:47.139 took the name the Sports Authority because it 00:15:47.139 --> 00:15:49.659 was the better known national brand. Mid -sense. 00:15:49.779 --> 00:15:52.360 But they decided to move the corporate headquarters 00:15:52.360 --> 00:15:57.259 to Inglewood. To Gart's backyard. Right. And 00:15:57.259 --> 00:16:00.259 the CEO of the new combined company was Doug 00:16:00.259 --> 00:16:03.159 Morton, who was the Gart CEO. So you had this 00:16:03.159 --> 00:16:06.539 really weird situation where the brain of the 00:16:06.539 --> 00:16:09.200 company was Gart, the old school service oriented 00:16:09.200 --> 00:16:12.419 relationship driven culture. But the face of 00:16:12.419 --> 00:16:15.889 the company was Sports Authority, the big. corporate 00:16:15.889 --> 00:16:18.490 transaction -driven brand. That sounds like an 00:16:18.490 --> 00:16:21.090 identity crisis waiting to happen. It was a massive 00:16:21.090 --> 00:16:22.990 one. They spent the next several years just trying 00:16:22.990 --> 00:16:24.610 to integrate the different systems. You have 00:16:24.610 --> 00:16:27.129 to imagine Gart used one computer system for 00:16:27.129 --> 00:16:29.730 inventory, Sportmart used another, Oshman's used 00:16:29.730 --> 00:16:32.629 a third, and TSA used a fourth. What a nightmare. 00:16:32.830 --> 00:16:34.970 Just merging those databases is a nightmare that 00:16:34.970 --> 00:16:37.370 costs millions and takes years. And while all 00:16:37.370 --> 00:16:39.570 the executives are staring at spreadsheets trying 00:16:39.570 --> 00:16:42.269 to merge four companies into one, the customer 00:16:42.269 --> 00:16:44.850 is getting confused. The experience is probably... 00:16:44.840 --> 00:16:47.539 suffering. And the culture is getting diluted. 00:16:47.720 --> 00:16:51.480 By 2006, they made the final move and rebranded 00:16:51.480 --> 00:16:53.980 all the stores. The famous Sports Castle became 00:16:53.980 --> 00:16:56.860 just another sports authority. The Oshmans in 00:16:56.860 --> 00:16:59.240 Houston your family went to for 50 years became 00:16:59.240 --> 00:17:01.500 a sports authority. That's got to hurt if you're 00:17:01.500 --> 00:17:03.580 a local. Yeah. You grew up with Oshmans, it was 00:17:03.580 --> 00:17:06.519 your store, and suddenly it's this generic red 00:17:06.519 --> 00:17:09.200 sign from Florida. It completely erodes that 00:17:09.200 --> 00:17:11.180 local loyalty. You aren't my store anymore, you're 00:17:11.180 --> 00:17:13.740 just a store. And if you're just a store, then 00:17:13.740 --> 00:17:15.630 I'm going to shop wherever it's... cheapest or 00:17:15.630 --> 00:17:18.369 most convenient. Exactly. And speaking of money, 00:17:18.490 --> 00:17:22.210 this brings us to the pivotal moment. The moment 00:17:22.210 --> 00:17:24.549 where, according to most analysts, the fate of 00:17:24.549 --> 00:17:27.750 the company was sealed. 2006, the private equity 00:17:27.750 --> 00:17:30.930 era. Okay. This is where the story shifts. Up 00:17:30.930 --> 00:17:33.190 until now, we've been talking about retail strategy 00:17:33.190 --> 00:17:35.690 mergers, store counts, branding, things like 00:17:35.690 --> 00:17:38.369 that. Now we have to talk about financial engineering. 00:17:38.549 --> 00:17:41.369 Okay, lay it on us. What happened in 2006? In 00:17:41.369 --> 00:17:44.430 January 2006, the newly merged Sports Authority, 00:17:44.650 --> 00:17:47.750 a publicly created company, agreed to be purchased 00:17:47.750 --> 00:17:51.210 in a leveraged buyout, an LBO, by a private equity 00:17:51.210 --> 00:17:54.089 firm called Leonard Green and Partners. LBO, 00:17:54.309 --> 00:17:56.569 the term we hear all the time, usually followed 00:17:56.569 --> 00:17:59.170 by the word bankrupt. But let's really unpack 00:17:59.170 --> 00:18:00.890 the mechanics of it, because I think a lot of 00:18:00.890 --> 00:18:02.490 people don't realize how this actually works. 00:18:02.789 --> 00:18:05.490 It sounds innocent, like someone is just buying 00:18:05.490 --> 00:18:08.190 the company. It does, but the method is everything. 00:18:08.430 --> 00:18:12.450 The deal was valued at $1 .4 billion. In today's 00:18:12.450 --> 00:18:15.730 money, that's over $2 billion. A huge number. 00:18:15.930 --> 00:18:19.150 Huge. Now, Leonard Green, the private equity 00:18:19.150 --> 00:18:21.930 firm, didn't just write a check for $1 .4 billion 00:18:21.930 --> 00:18:24.809 from their own bank account. They borrowed a 00:18:24.809 --> 00:18:27.549 massive amount of that money, hundreds of millions 00:18:27.549 --> 00:18:30.269 of dollars, to fund the deal. Okay, so they took 00:18:30.269 --> 00:18:32.369 out a loan. That's normal. I take out a loan 00:18:32.369 --> 00:18:34.609 to buy a car. But here's the trick. Here's the 00:18:34.609 --> 00:18:37.230 move that defines an LBO. When you buy a car, 00:18:37.369 --> 00:18:39.710 you are responsible for paying back the loan. 00:18:39.829 --> 00:18:42.650 Right. In a leveraged buyout, the debt used to 00:18:42.650 --> 00:18:44.630 purchase the company is placed on the company 00:18:44.630 --> 00:18:47.250 that was just purchased. Wait, run that by me 00:18:47.250 --> 00:18:49.809 again. Leonard Green borrowed money to buy Sports 00:18:49.809 --> 00:18:51.930 Authority, and then they made Sports Authority 00:18:51.930 --> 00:18:54.430 responsible for paying back that loan. Let me 00:18:54.430 --> 00:18:56.730 see if I can use an analogy here. That's like 00:18:56.730 --> 00:19:00.019 me buying your house. But I take out a mortgage 00:19:00.019 --> 00:19:03.099 in your name to pay for it. And then I tell you 00:19:03.099 --> 00:19:06.140 that you have to work extra shifts at your job 00:19:06.140 --> 00:19:09.000 to pay the monthly bill for the house that I 00:19:09.000 --> 00:19:11.859 now own. That is a simplified but functionally 00:19:11.859 --> 00:19:15.259 accurate way to view the burden. Suddenly, Sports 00:19:15.259 --> 00:19:17.720 Authority, which was a profitable company with 00:19:17.720 --> 00:19:21.319 manageable liabilities, had this massive anchor 00:19:21.319 --> 00:19:24.119 of debt tied around its neck. So before the deal. 00:19:24.539 --> 00:19:27.420 their profits went to shareholders or to reinvestment, 00:19:27.440 --> 00:19:30.619 like fixing up stores. After the deal, a huge 00:19:30.619 --> 00:19:32.680 chunk of their profits went to paying interest 00:19:32.680 --> 00:19:35.240 on the debt used to buy them. Correct. And this 00:19:35.240 --> 00:19:37.460 changes everything about how you run the company. 00:19:37.640 --> 00:19:39.680 The number one priority is no longer selling 00:19:39.680 --> 00:19:42.059 baseball gloves or serving the customer. It's 00:19:42.059 --> 00:19:44.250 servicing the debt. it becomes the only thing 00:19:44.250 --> 00:19:46.069 that matters. How much debt are we talking about? 00:19:46.190 --> 00:19:48.009 We're talking hundreds and hundreds of millions 00:19:48.009 --> 00:19:50.690 of dollars. And the interest payments are relentless. 00:19:51.089 --> 00:19:54.150 They come every quarter, no matter what. This 00:19:54.150 --> 00:19:56.369 means you have a lot less free cash flow. And 00:19:56.369 --> 00:19:58.309 free cash flow is the money you actually use 00:19:58.309 --> 00:20:00.390 to run the business. The money you use to fix 00:20:00.390 --> 00:20:03.750 the roof, or buy new carpet, or upgrade your 00:20:03.750 --> 00:20:06.410 ancient computer systems. Or, and this is the 00:20:06.410 --> 00:20:09.319 most important part. The money you use to build 00:20:09.319 --> 00:20:12.880 a world -class e -commerce website to fight Amazon. 00:20:13.180 --> 00:20:16.779 Right, because the year is 2006. This is exactly 00:20:16.779 --> 00:20:19.849 when Amazon is starting to... Eat everyone's 00:20:19.849 --> 00:20:21.970 lunch in every category. Precisely. So at the 00:20:21.970 --> 00:20:24.170 exact moment in history when sports authority 00:20:24.170 --> 00:20:26.650 needed to be nimble, when they needed to invest 00:20:26.650 --> 00:20:28.950 hundreds of millions into digital infrastructure 00:20:28.950 --> 00:20:31.450 and renovating their stores to compete, they 00:20:31.450 --> 00:20:33.269 were handcuffed. They simply couldn't spend the 00:20:33.269 --> 00:20:35.089 money because they had to pay the bank. That 00:20:35.089 --> 00:20:37.890 is just tragic timing. It's the black box era 00:20:37.890 --> 00:20:39.910 because once they went private, they stopped 00:20:39.910 --> 00:20:41.930 filing their financial statements with the SEC. 00:20:42.230 --> 00:20:44.130 We couldn't see the books anymore. The public 00:20:44.130 --> 00:20:46.589 had no idea how much trouble they were in. But 00:20:46.589 --> 00:20:48.849 we could see the stores. I remember going into 00:20:48.849 --> 00:20:51.750 a sports authority around, say, 2010 or 2012, 00:20:52.069 --> 00:20:56.390 and it just felt tired. It felt neglected. The 00:20:56.390 --> 00:20:58.970 lighting was dim. The carpets were stained and 00:20:58.970 --> 00:21:01.950 curling at the edges. The employees were scarce 00:21:01.950 --> 00:21:05.190 and seemed unhappy. That is the physical manifestation 00:21:05.190 --> 00:21:08.720 of a leveraged buyout. Every dollar that could 00:21:08.720 --> 00:21:10.799 have been spent on a cleaner carpet or a better 00:21:10.799 --> 00:21:13.299 training program was instead being sent to the 00:21:13.299 --> 00:21:15.700 lenders. And yet, even while they were drowning 00:21:15.700 --> 00:21:19.240 in this debt, they kept eating. I see here that 00:21:19.240 --> 00:21:22.279 later in 2006, they acquired parts of Copeland 00:21:22.279 --> 00:21:25.559 Sports. It's almost pathological, isn't it? Copeland's 00:21:25.559 --> 00:21:27.259 was another chain that had filed for bankruptcy, 00:21:27.339 --> 00:21:29.440 and Sports Authority came in and picked up the 00:21:29.440 --> 00:21:32.000 leases for seven of their locations. It's like 00:21:32.000 --> 00:21:34.519 a corporate reflex. We are a shark. We must keep 00:21:34.519 --> 00:21:37.160 moving forward and acquiring, even if the shark 00:21:37.160 --> 00:21:39.160 is bleeding out. So they're cutting costs in 00:21:39.160 --> 00:21:41.819 the stores, making the experience worse. But 00:21:41.819 --> 00:21:43.940 they also started changing what they sold. And 00:21:43.940 --> 00:21:45.779 this is something I definitely noticed as a customer. 00:21:46.119 --> 00:21:48.960 The brands changed. This is the private label 00:21:48.960 --> 00:21:50.980 strategy. Explain the economics of that for us. 00:21:55.069 --> 00:21:56.970 a house brand that nobody's ever heard of. It's 00:21:56.970 --> 00:22:00.069 all about profit margin. Let's say you sell a 00:22:00.069 --> 00:22:03.710 pair of Nike running shoes for $100. You, the 00:22:03.710 --> 00:22:07.390 retailer, might have to pay Nike $55 or $60 for 00:22:07.390 --> 00:22:10.410 those shoes. Your gross profit is $40. Okay, 00:22:10.490 --> 00:22:13.089 makes sense. Now let's say you go to a factory 00:22:13.089 --> 00:22:16.410 in China and manufacture your own shoes. You 00:22:16.410 --> 00:22:19.460 call them... Aspire or something. You pay the 00:22:19.460 --> 00:22:22.059 factory maybe $15 to make them. You sell them 00:22:22.059 --> 00:22:24.880 for $80. So they're cheaper for the customer. 00:22:25.000 --> 00:22:26.839 Cheaper for the customer, but your profit is 00:22:26.839 --> 00:22:30.460 $65. So you make way more money per sale. Much 00:22:30.460 --> 00:22:34.099 more. So when that debt pressure mounted, sports 00:22:34.099 --> 00:22:37.240 authority leaned heavily, heavily into private 00:22:37.240 --> 00:22:39.440 labels. They were desperately trying to capture 00:22:39.440 --> 00:22:41.880 that higher margin on every sale. I recognize 00:22:41.880 --> 00:22:44.069 some of these names in a list. Alpine Design. 00:22:44.309 --> 00:22:46.009 I definitely had a sleeping bag from them at 00:22:46.009 --> 00:22:48.069 some point. I just assumed it was a real outdoor 00:22:48.069 --> 00:22:50.369 company. Nope. It was a house brand. They also 00:22:50.369 --> 00:22:52.630 owned Sims snowboards. Now that one hurts my 00:22:52.630 --> 00:22:55.890 soul a little bit. Tom Sims was a legitimate 00:22:55.890 --> 00:22:58.589 pioneer. He basically co -invented the modern 00:22:58.589 --> 00:23:01.769 snowboard. He did. But somewhere along the line, 00:23:01.849 --> 00:23:04.349 the brand name ended up in the Sports Authority 00:23:04.349 --> 00:23:07.890 portfolio. So by 2012, if you bought a Sims board, 00:23:08.109 --> 00:23:10.809 you weren't buying from some cool indie skate 00:23:10.809 --> 00:23:13.789 shop. You were buying a mass -produced house 00:23:13.789 --> 00:23:16.970 brand. What about Tommy Armour golf clubs? House 00:23:16.970 --> 00:23:20.069 brand. Ram golf. House brand. Parkside trampolines. 00:23:20.069 --> 00:23:22.349 All house brands. They were trying to be the 00:23:22.349 --> 00:23:24.589 manufacturer and the retailer for everything. 00:23:24.910 --> 00:23:28.069 The problem is, as a consumer, I'm not stupid. 00:23:28.670 --> 00:23:31.690 I know that Aspire isn't Lululemon. I know that 00:23:31.690 --> 00:23:34.430 Alpine Design isn't the North Face or Patagonia. 00:23:34.549 --> 00:23:37.069 Exactly. You dilute the brand equity of the store 00:23:37.069 --> 00:23:39.410 itself. People used to go to the sports castle 00:23:39.410 --> 00:23:41.269 to find the best, most authentic gear in the 00:23:41.269 --> 00:23:43.650 world. Now they are walking into a dingy strip 00:23:43.650 --> 00:23:45.789 mall to find a bunch of knockoffs. So let's recap 00:23:45.789 --> 00:23:48.509 the situation around, say, 2012. They're losing 00:23:48.509 --> 00:23:50.849 the cool factor because the house brands. They're 00:23:50.849 --> 00:23:52.829 losing the service factor because they cut staff 00:23:52.829 --> 00:23:55.609 to save money. And they're losing the price factor 00:23:55.609 --> 00:23:57.930 because Amazon is undercutting them on everything. 00:23:58.170 --> 00:23:59.990 They were stuck in what retail analysts called 00:23:59.990 --> 00:24:02.009 the muddy middle. They did try to pivot, though, 00:24:02.049 --> 00:24:04.890 right? I see SA Elite in the notes here. What 00:24:04.890 --> 00:24:07.710 was that? This was in 2010. And to give them 00:24:07.710 --> 00:24:09.769 credit, they correctly identified the problem. 00:24:09.990 --> 00:24:12.349 They knew their big box warehouse model was dying, 00:24:12.549 --> 00:24:16.009 so they launched SA Elite. These were much smaller 00:24:16.009 --> 00:24:18.990 stores, usually in more upscale shopping centers. 00:24:19.329 --> 00:24:22.490 So no kayaks or basketball hoops, just expensive 00:24:22.490 --> 00:24:25.369 yoga pants and high -end running jackets. Exactly. 00:24:25.390 --> 00:24:27.329 They were trying to segment the market. They 00:24:27.329 --> 00:24:30.130 wanted to capture that affluent shopper who doesn't 00:24:30.130 --> 00:24:32.089 want to wander through a 40 ,000 square foot 00:24:32.089 --> 00:24:34.970 warehouse to find a pair of leggings. It sounds 00:24:34.970 --> 00:24:37.500 like a smart play, honestly. It was a logical 00:24:37.500 --> 00:24:40.680 play. But here's the problem. Scale. They only 00:24:40.680 --> 00:24:43.099 opened a handful of these stores. It was an experiment. 00:24:43.420 --> 00:24:47.559 But when you have 450 massive underperforming 00:24:47.559 --> 00:24:51.000 warehouses dragging you down, five nice little 00:24:51.000 --> 00:24:52.980 boutiques aren't going to save the show. They 00:24:52.980 --> 00:24:55.059 just didn't have the capital to do a full scale 00:24:55.059 --> 00:24:57.099 pivot. Because of the debt. Because of the debt. 00:24:57.180 --> 00:24:59.299 It always, always comes back to the debt. And 00:24:59.299 --> 00:25:01.980 while all this is happening internally, while 00:25:01.980 --> 00:25:04.299 the stores are rotting and the pivot is failing. 00:25:05.339 --> 00:25:08.079 They decide to make the biggest, loudest, most 00:25:08.079 --> 00:25:10.940 expensive marketing move possible. The stadium. 00:25:11.059 --> 00:25:13.720 Sports Authority Field at Mile High. Home of 00:25:13.720 --> 00:25:16.079 the Denver Broncos. They bought the naming rights 00:25:16.079 --> 00:25:18.920 in 2011. That is hallowed ground in Colorado. 00:25:19.579 --> 00:25:22.339 That's John Elway's house. It is. And the deal 00:25:22.339 --> 00:25:25.680 costs them roughly $6 million a year. Why do 00:25:25.680 --> 00:25:29.480 that? Why spend $6 million a year on a sign when 00:25:29.480 --> 00:25:31.279 you can't afford to fix the air conditioning 00:25:31.279 --> 00:25:34.119 in your stores? It's a vanity play. It projects 00:25:34.119 --> 00:25:36.220 strength and stability even when there is none. 00:25:36.640 --> 00:25:38.759 If your name is on the stadium or an NFL team 00:25:38.759 --> 00:25:41.480 plays on national television every Sunday, surely 00:25:41.480 --> 00:25:43.259 you must be doing well. So it's a way to keep 00:25:43.259 --> 00:25:45.200 the vendors happy. It keeps the vendors' shipping 00:25:45.200 --> 00:25:47.720 product. It keeps the lenders calm. It's a mask. 00:25:48.079 --> 00:25:50.339 But the mask can only stay on for so long. And 00:25:50.339 --> 00:25:53.319 in 2016, it slipped off for good. Let's talk 00:25:53.319 --> 00:25:56.579 about the collapse. Section 6. The timeline of 00:25:56.579 --> 00:25:59.680 destruction. Because it happened shockingly fast. 00:25:59.940 --> 00:26:03.059 Incredibly fast. February 2016. What was the 00:26:03.059 --> 00:26:05.559 trigger? What was the first domino to fall? It 00:26:05.559 --> 00:26:07.559 wasn't just one thing, but the immediate trigger 00:26:07.559 --> 00:26:10.140 was a missed interest payment. They had a massive 00:26:10.140 --> 00:26:12.680 payment due on that LBO debt load and they just, 00:26:12.720 --> 00:26:15.220 they couldn't make it. The checking account was 00:26:15.220 --> 00:26:17.779 empty. So the bill finally came due. But there 00:26:17.779 --> 00:26:20.440 was a second trigger. One that is unique to the 00:26:20.440 --> 00:26:23.480 world of retail. The suppliers. The people who 00:26:23.480 --> 00:26:26.519 actually make the gear. Right. Nike, Under Armour. 00:26:26.920 --> 00:26:30.259 The North Face, Wilson, Rawlings, these companies 00:26:30.259 --> 00:26:32.980 aren't charities. When they heard rumors that 00:26:32.980 --> 00:26:35.559 Sports Authority was insolvent, they got very, 00:26:35.700 --> 00:26:38.700 very scared. Because if I'm Nike, and I send 00:26:38.700 --> 00:26:40.619 you a million dollars worth of Air Jordans on 00:26:40.619 --> 00:26:43.359 credit, and then you go bankrupt next week... 00:26:43.440 --> 00:26:45.500 I might never get paid for those shoes. Exactly. 00:26:45.500 --> 00:26:47.740 So what did they do? They stopped shipping. Or 00:26:47.740 --> 00:26:50.299 they demanded cash up front for any new deliveries. 00:26:50.599 --> 00:26:52.799 Which Sports Authority obviously didn't have. 00:26:52.960 --> 00:26:55.240 Right. And for a lot of the winter sports gear, 00:26:55.380 --> 00:26:57.740 it's even worse. A lot of that expensive ski 00:26:57.740 --> 00:27:01.319 and snowboard gear is sold on consignment. That 00:27:01.319 --> 00:27:04.619 means the manufacturer, like Burton or K2, still 00:27:04.619 --> 00:27:06.799 technically owns the coat while it's sitting 00:27:06.799 --> 00:27:09.160 on the rack in the store. Oh, wow. When bankruptcy 00:27:09.160 --> 00:27:12.779 looked likely... Those brands sent letters demanding 00:27:12.779 --> 00:27:15.720 their inventory back immediately. So the shelves 00:27:15.720 --> 00:27:17.859 start to go empty. The shelves go empty. And 00:27:17.859 --> 00:27:19.660 when the shelves are empty, the customers stop 00:27:19.660 --> 00:27:23.680 coming in. It's a death spiral. March 2, 2016. 00:27:24.160 --> 00:27:27.039 They make it official. They file for Chapter 00:27:27.039 --> 00:27:30.579 11 bankruptcy. Now, can you explain the difference 00:27:30.579 --> 00:27:33.079 for the listener, Chapter 11 versus Chapter 7? 00:27:33.390 --> 00:27:36.829 Sure. Chapter 11 is reorganization. It's the 00:27:36.829 --> 00:27:39.230 emergency room of the business world. You go 00:27:39.230 --> 00:27:41.609 in. The court puts a shield around you to protect 00:27:41.609 --> 00:27:43.670 you from your creditors for a little while. And 00:27:43.670 --> 00:27:45.849 you try to come up with a plan to fix the business. 00:27:46.069 --> 00:27:48.170 You close the worst performing stores. You try 00:27:48.170 --> 00:27:50.549 to renegotiate leases and debt. And you hope 00:27:50.549 --> 00:27:53.329 to come out the other side as a smaller but healthier 00:27:53.329 --> 00:27:55.859 company. That was the plan. That was the initial 00:27:55.859 --> 00:27:57.440 hope. They announced they were going to close 00:27:57.440 --> 00:28:00.400 about 140 of the 450 stores and try to keep the 00:28:00.400 --> 00:28:03.039 rest open. So what went wrong? Why didn't they 00:28:03.039 --> 00:28:06.140 make it out of the ER? The doctors, in this case, 00:28:06.140 --> 00:28:08.400 the lenders and the creditors, took one look 00:28:08.400 --> 00:28:10.519 at the patient and decided it wasn't worth saving. 00:28:10.759 --> 00:28:13.299 That is absolutely brutal. It's just cold math. 00:28:13.420 --> 00:28:15.599 They ran the numbers. They looked at the liquidation 00:28:15.599 --> 00:28:17.980 value of the inventory. You know, how much cash 00:28:17.980 --> 00:28:19.920 could they get if they just sold everything for 00:28:19.920 --> 00:28:22.339 50 cents on the dollar right now? And they compared 00:28:22.339 --> 00:28:24.900 that to the risk and cost of trying to run the 00:28:24.900 --> 00:28:27.380 business for another year. And the math said 00:28:27.380 --> 00:28:30.440 to pull the plug. The math said dead is better 00:28:30.440 --> 00:28:34.299 than alive. So in May 2016, just two months later, 00:28:34.480 --> 00:28:37.259 the court converts the case to Chapter 7. Chapter 00:28:37.259 --> 00:28:41.119 7, liquidation, the end of the line. The CEO 00:28:41.119 --> 00:28:43.720 at the time, Michael Foss, has to make the announcement. 00:28:43.920 --> 00:28:46.900 All stores will close by the end of August. 14 00:28:46.900 --> 00:28:52.059 ,000 employees, 450 stores, all gone in a matter 00:28:52.059 --> 00:28:54.319 of weeks. And this brings us to the vultures, 00:28:54.380 --> 00:28:57.039 or as you call them in our notes, the scavengers. 00:28:57.450 --> 00:28:59.849 Dick's Sporting Goods. The arch nemesis. The 00:28:59.849 --> 00:29:02.549 primary rival. For years, they had been battling 00:29:02.549 --> 00:29:05.069 it out for market share, mall by mall. And Dick's 00:29:05.069 --> 00:29:07.950 played the situation masterfully. How so? They 00:29:07.950 --> 00:29:09.769 didn't try to buy sports authority as a going 00:29:09.769 --> 00:29:12.190 concern. They didn't want the massive debt. They 00:29:12.190 --> 00:29:14.609 didn't want the bad leases and all those dying 00:29:14.609 --> 00:29:16.529 strip malls. They waited for the carcass to hit 00:29:16.529 --> 00:29:19.990 the ground. They waited. June 2016, the bankruptcy 00:29:19.990 --> 00:29:23.009 auction. Dick's Sporting Goods showed up and 00:29:23.009 --> 00:29:25.890 bought the intellectual property. The IP. Not 00:29:25.890 --> 00:29:28.269 the stores, not the inventory. Just the name 00:29:28.269 --> 00:29:32.009 Sports Authority, the customer email lists, the 00:29:32.009 --> 00:29:35.490 credit card data, and most importantly, the website 00:29:35.490 --> 00:29:39.410 domain. They bought the URL sportsauthority .com. 00:29:39.470 --> 00:29:42.869 For $15 million, which in the grand scheme of 00:29:42.869 --> 00:29:46.369 things is pennies. So if I, as a customer, typed 00:29:46.369 --> 00:29:49.549 sportsauthority .com into my web browser. in 00:29:49.549 --> 00:29:52.410 July of 2016. It didn't take you to a liquidation 00:29:52.410 --> 00:29:55.250 sale or a goodbye message. It redirected you 00:29:55.250 --> 00:29:57.849 immediately and seamlessly to Dick'sSportingGoods 00:29:57.849 --> 00:30:00.789 .com. That is the ultimate conquest. That's like 00:30:00.789 --> 00:30:02.630 conquering a kingdom and replacing their flag 00:30:02.630 --> 00:30:04.670 with yours on the castle. Your traffic is now 00:30:04.670 --> 00:30:06.990 my traffic. It's total victory. In one move, 00:30:07.029 --> 00:30:08.990 they erase their biggest competitor and absorb 00:30:08.990 --> 00:30:11.569 their entire digital identity overnight. And 00:30:11.569 --> 00:30:14.190 the physical stores. The sports castle. The sports 00:30:14.190 --> 00:30:16.369 castle sat empty for years. It's still standing 00:30:16.369 --> 00:30:18.210 in Denver. It's a protected historic landmark. 00:30:18.720 --> 00:30:21.900 But the retail soul of it is gone. And the stadium. 00:30:22.039 --> 00:30:24.359 Oh, the stadium. The Denver Broncos couldn't 00:30:24.359 --> 00:30:26.619 get that sign down fast enough. It was an embarrassment. 00:30:26.920 --> 00:30:29.980 It was. Their stadium was named after a bankrupt 00:30:29.980 --> 00:30:32.279 company. They actually had to go to the bankruptcy 00:30:32.279 --> 00:30:35.740 court and pay money to buy back the naming rights 00:30:35.740 --> 00:30:38.099 from the liquidation estate just so they could 00:30:38.099 --> 00:30:40.400 legally strip the name off the building. Talk 00:30:40.400 --> 00:30:42.920 about a fall from grace. From owning the skyline 00:30:42.920 --> 00:30:45.220 to being scraped off the wall like a piece of 00:30:45.220 --> 00:30:49.299 old tape. So let's zoom out here. We've gone 00:30:49.299 --> 00:30:52.079 from Nathan Gart's $50 investment in fishing 00:30:52.079 --> 00:30:57.140 rods to a $1 .4 billion private equity deal to 00:30:57.140 --> 00:30:59.720 a liquidation sale where the URL was the most 00:30:59.720 --> 00:31:04.220 valuable asset. It's a tragic arc. But what is 00:31:04.220 --> 00:31:06.299 the big takeaway? Why does this story matter 00:31:06.299 --> 00:31:08.900 to someone who isn't a retail analyst? I think 00:31:08.900 --> 00:31:11.339 it matters because it exposes the fundamental 00:31:11.339 --> 00:31:14.200 fragility of that big box model in the modern 00:31:14.200 --> 00:31:16.440 era. We talked about the muddy middle. Sports 00:31:16.440 --> 00:31:18.460 authority got stuck there. They weren't the cheapest 00:31:18.460 --> 00:31:20.460 Amazon and Walmart were. They weren't the best 00:31:20.460 --> 00:31:22.660 experience or the most knowledgeable places like 00:31:22.660 --> 00:31:25.640 REI or your local specialty running or ski shop 00:31:25.640 --> 00:31:29.559 were. They were just big. And just there is the 00:31:29.559 --> 00:31:31.960 kill zone in the modern economy. You have to 00:31:31.960 --> 00:31:34.839 be exceptional at something. Price, convenience, 00:31:35.059 --> 00:31:37.740 or experience. You can't just be mediocre at 00:31:37.740 --> 00:31:40.339 all three. And the second lesson has to be about 00:31:40.339 --> 00:31:42.579 the debt. It's the villain of the whole story. 00:31:42.759 --> 00:31:46.259 Absolutely. The LBO model creates zombie companies. 00:31:46.599 --> 00:31:48.559 It takes a business that might have been able 00:31:48.559 --> 00:31:50.460 to navigate the changes, that might have been 00:31:50.460 --> 00:31:53.359 able to shrink, pivot, and survive, and it ties 00:31:53.359 --> 00:31:55.680 their hands and throws them in the deep end of 00:31:55.680 --> 00:31:57.700 the pool. It's like sending a soldier into a 00:31:57.700 --> 00:31:59.599 huge battle, but first you take away most of 00:31:59.599 --> 00:32:02.200 his ammo and put 50 pounds of rocks in his backpack. 00:32:02.500 --> 00:32:04.680 And then you act surprised when he loses the 00:32:04.680 --> 00:32:06.720 fight. It really makes you look at the survivors 00:32:06.720 --> 00:32:09.890 differently. I walk into a Dick's Sporting Goods 00:32:09.890 --> 00:32:12.150 now, and it's oppressive. They have these new 00:32:12.150 --> 00:32:14.750 house of sport concepts, rock climbing walls, 00:32:15.029 --> 00:32:18.569 batting cages, putting greens. It feels, well, 00:32:18.730 --> 00:32:21.089 it feels like the sports castle. They are relearning 00:32:21.089 --> 00:32:23.150 the lesson that Nathan Gart taught us all the 00:32:23.150 --> 00:32:26.690 way back in 1971. Experience matters. Community 00:32:26.690 --> 00:32:29.490 matters. But it does raise a provocative question 00:32:29.490 --> 00:32:33.109 for the listener. Are they safe? Is Dick's Sporting 00:32:33.109 --> 00:32:37.589 Goods safe? In retail, no one is ever safe. That's 00:32:37.589 --> 00:32:40.230 a comforting thought. It's the truth. Dix is 00:32:40.230 --> 00:32:43.369 winning now, but this industry is cyclical. If 00:32:43.369 --> 00:32:46.150 they stop innovating for a second, or more to 00:32:46.150 --> 00:32:48.829 the point, if they get bought out by a private 00:32:48.829 --> 00:32:51.769 equity firm that decides to load them up with 00:32:51.769 --> 00:32:54.109 debt to extract value. They could be the next 00:32:54.109 --> 00:32:56.609 ghost town. They could absolutely be the next 00:32:56.609 --> 00:32:59.869 ghost label on a stucco wall. It's a sobering 00:32:59.869 --> 00:33:03.150 thought. That massive concrete box in the strip 00:33:03.150 --> 00:33:07.009 mall. It's not just an empty building. It really 00:33:07.009 --> 00:33:09.390 is a monument. A monument to the category killer 00:33:09.390 --> 00:33:12.089 era and a warning about the dangers of debt. 00:33:12.369 --> 00:33:14.549 Well, next time you drive past one, now you'll 00:33:14.549 --> 00:33:16.630 know the whole story. You'll know about the paperboy, 00:33:16.769 --> 00:33:19.609 the fishing rods, the Kmart years, and the private 00:33:19.609 --> 00:33:21.509 equity deal that brought it all crashing down. 00:33:21.690 --> 00:33:23.829 And you'll know why you're probably buying your 00:33:23.829 --> 00:33:26.589 next pair of running shoes online. Exactly. Thanks 00:33:26.589 --> 00:33:28.589 for taking this deep dive with us. My pleasure. 00:33:28.809 --> 00:33:30.809 Stay curious, and we'll catch you on the next 00:33:30.809 --> 00:33:30.930 one.