Retailers will reap the biggest benefits from Sports Authority's new plan to liquidate its assets in bankruptcy, according to Fabian Wealth Strategies portfolio manager Christopher Versace, but they won't be the only beneficiaries as vendors will also see opportunities to benefit.
Two months ago, Sports Authority announced it was seeking bankruptcy protection while closing 140 of its approximately 450 stores. But last week Sports Authority notified the U.S. Bankruptcy Court in Wilmington, Del., that it would be selling off its remaining assets instead of trying to reorganize under Chapter 11 protection.
Dick's Sporting Goods (DKS) has been seen as being in the best position to benefit from those store closings, with about 150 of Sports Authority stores located in the vicinity of Dick's franchises, according to a Canaccord Genuity note earlier this year. According to analyst Camilo Lyon, Dick's could add up to $119 million in sales -- assuming a 75% rate of sales recapture -- for every 100 stores Sports Authority closes.
Sports Authority's decision led analysts at MKM Partners last week to initiate coverage of Dick's with a Buy rating and $56 price target.
"We estimate that more than 100 Dick's Sporting Goods stores are within close proximity to one of the 140 TSA stores that are closing (and doing about $700 million in sales by our estimation) in what could be just the first wave in an eventual total-company liquidation," MKM analyst Patrick McKeever wrote Friday. "Dick's has an aggressive plan to capture displaced market share through investments in marketing, store labor and elsewhere. While we have built some benefit into our model in 2H16 and FY17, our assumptions could prove conservative."
The firm's price target represents a potential 19.4% increase from the stock's most recent opening price. Dick's shares were up nearly 4% on heavy volume Monday. The stock is up about 8% since Sports Authority's original bankruptcy filing, and up 37% year to date.
While fellow sports retailers like Trifecta Stocks holding Foot Locker (FL) and Champs could also see a benefit from the store closings, it is unclear how Sports Authority's new course of action will affect vendors like Nike (NKE) and Under Armour (UA), who have been combating rising inventory.
Last month, following the company's earnings beat, Real Money's Jim Cramer downplayed Under Armour's inventory buildup because of the company's surprising ability to sustain growth. "When you see that big inventory build, a lot of people get worried," Cramer said. "I think you need that inventory. They're making a lot of very bold claims."
Versace agrees with Cramer's assessment of Growth Seeker holding Under Armour. Despite the company's growing inventory, there is also growing demand for its products and Under Armour has yet to reach market saturation.
That room to grow along with the company's continued emphasis on direct-to-consumer sales puts Under Armour and other vendors in prime position to benefit from new opportunities created by Sports Authority's crisis.