One of the topics we've talked about over the last few weeks as it relates to Growth Seeker holding Under Armour (UA) and Trifecta Stocks' Foot Locker (FL) -- the pending bankruptcy of Sports Authority -- has finally happened.
Sports Authority filed for Chapter 11 bankruptcy yesterday and has agreed to take up to $595 million in debtor-in-possession financing during its restructuring. The company -- which according to Moody's Investors Service, had revenue of $2.5 billion in the 12 months ended May 2, 2015 -- is expected to close at least 140 of its 463 locations in 41 states plus Puerto Rico, and to shutter two distribution centers, in Denver and Chicago, as part of its restructuring plan. If Sports Authority can't find a buyer that would "put more money into the business," the company would have to close the rest of its locations by the end of April.
Because Sports Authority is likely to shrink substantially and could disappear altogether, consumers are likely to shift their buying to other athletic apparel, footwear and sporting retailers. A logical beneficiary is Dick's Sporting Goods (DKS) given that one-third of Dick's stores overlap with Sports Authority locations, according to research from Canaccord Genuity. Other vendors, such as Foot Locker, are poised to pick up incremental share -- especially as it expands it presence in online and mobile shopping to match shifting consumer trends.
We would remind subscribers that Dick's is Under Armour's largest customer, clocking in at 11.5% of sales for 2015, and is benefitting from its strong store-in-store positioning with Dick's locations. Incremental share gains at Dick's and other retailers such as Foot Locker as part of the bankruptcy fallout should be a net positive for Under Armour's business.
That's the good news. The not so good news is that Under Armour is listed as being owed $23.2 million from Sports Authority. For some perspective, that $23.2 million equates to a very modest dent in Under Armour's consensus revenue forecast of $4.98 billion for this year, up from $3.96 billion in 2015.
Also from Real Money: Sports Authority Turnover a Big Win for Dick's Sporting Goods
The bottom line is the Sports Authority bankruptcy may result in an ever so slight ripple in the first half of 2016 for Under Armour, but that is more than overshadowed by the share gains at key UA vendor partners that are likely to occur.
We continue to like Under Armour's growth strategy that centers on increasing its geographic footprint as well as expanding its women's and athletic footwear portfolio. We rate UA shares a One with a long-term price target of $120.
As for Foot Locker, this event is a positive for FL shares, and makes us increasingly comfortable with the company's ability to deliver double-digit earnings growth in 2016. We continue to rate FL shares a One with an $80 price target.
Another potential beneficiary of Sports Authority's troubles, and as consumers increasingly shop online, is Growth Seeker holding Amazon (AMZN). As we have discussed of late, Amazon is focused on growing its apparel business. We continue to rate AMZN shares a One with a $725 price target.