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Why some sporting goods retailers struggle in a tough market

For some sporting goods retailers, business is anything but fun and games.

First, Sports Authority, a 450-store chain based in Englewood, Colorado, filed for bankruptcy protection on March 2. A month later, Vestis Retail Group, the corporate parent of Sport Chalet, Eastern Mountain Sports, and Bob's Stores, sought protection from creditors. Store closures, not surprisingly, are in the works.

The reasons for the chains' woes are many, according to retail analysts. Both Sports Authority and Vestis were taken private through leveraged buyouts, which loaded their balance sheets with debt that kept them from investing enough in their businesses. Private equity firm Leonard Green & Partners acquired Sports Authority, for $1.3 billion in 2006. The chain now has at least $463 million in debt. Vestis, which owns 144 stores, carries $246 million in debt. Versa Capital, a private equity firm, formed Vestis through acquisitions.

"The pressure in the sporting goods business is no different than it always has been," said Joseph Feldman, an analyst at Telsey Advisory Group, who added that competition from online retailers is particularly intense.

Dick's Sporting Goods (DKS), which has 500 locations, along with closely held Academy Sports & Outdoors and Modell's Sporting Goods, a family-owned chain, all have expressed interest in acquiring Sports Authority assets, according to Reuters. A Wall Street Journal report noted that Sports Authority's assets will be sold in two auctions in May. Officials from the companies involved in the sale process didn't respond to requests for comment.

Competition pummeled Sports Authority and Vestis from a variety of sources ranging from market leader Dick's to non-traditional sources such as Walmart (WMT) and Target (TGT) to specialized retailers such as Nike (NKE) and Lululemon (LULU). Moreover, Amazon (AMZN) looms large over the sporting goods markets as it does in other retail sectors.

"There's Sports Authority with their run-down stores, and there's Dick's will all kinds of activities in their stores, shooting arrows, golfing," said Howard Davidowitz, the head of the retail consultancy and investment bank Davidowitz & Associates. "The stores are beautiful. The assortment is 10 times better than Sports Authority."

Dicks is "gobbling up market share" and has plenty of cash to bid for the assets of its bankrupt rivals, according to Davidowitz. He argues the long-term prognosis for Sports Authority and Vestis isn't good as most chains that seek protection for creditors go out of business within five years. Macy's (M) and Toys R Us are among the exceptions.

Competition in footwear, the most profitable sporting good, is especially fierce. Nike, the largest maker of athletic apparel, has been boosting its retail business over the past few years and plans to grow its direct-to-consumer revenue, which includes e-commerce, from $6.6 billion in fiscal 2015, to $16 billion by fiscal 2020. Under Armour (UA), a maker of trendy yoga apparel and athletic footwear, plans to open 200 stores in 2016.

"You have got to compete with a company like Nike, which is a monster of the Midway," Davidowitz said.

Companies with "uninteresting stores" are finding it increasingly difficult to get customers in the door, he added.