Footstar started the process of dismantling the Footaction business for good last week, announcing Thursday that it would sell off the remaining 353-store athletic footwear chain and then announced Friday that Shawn Neville, the former Reebok North America SVP/GM that replaced Ralph Parks as CEO of the chain, was “no longer with the company”.
The company said the remaining business, which is expected to be auctioned off by mid-April, would be managed by current SVP/GMM Mark Lardie, VP of Human Resources Jodi Johnson, Dennis Lyons, VP of Sales & Operations and Mike Lynch, VP of Finance.
Unless youve been living incommunicado on the International Space Station for the last month, you know that Footstar has commenced GOB sales at all of its Just for Feet locations and 75 poor-performing Footaction stores. The balance of the Footaction stores were seen as a centerpiece for a profitable athletic business for Footstar.
Well, all that went out the window a week ago after Footstar decided to go toe-to-toe with Nike and filed motions to hold the worlds-largest-athletic-brand — and supplier of more than 70% of Footactions product — in civil contempt for pulling its trade discount. (SEW_0412) The two later agreed to a temporary deal to keep the goods flowing, but it now appears that Nike is unwilling to support Footstar beyond a 75-day period. That reality is at the center of Footstars most recent motions to immediately conduct an auction for all the remaining assets of the Footaction chain, in whole or in parts.
In court papers filed Friday, Footstar cited Nikes unwillingness to support the ongoing business as the primary reason for selling off the Footaction stores. The Bankruptcy Court judge approved Footstars motions to expedite the auction process, which will start with a hearing on April 5 to “consider the procedural elements of the Sale Motion and the Procedures Order”. Objections to the Procedures Order are due April 1.
Notices were mailed Friday to all known potential suitors, which include strategic as well as financial investors and the usual liquidation guys. Footstar said in the filing that previous efforts to sell the Athletic division resulted in interest from at least 10 potential buyers that have already signed confidentiality agreements. Bids for the business must be received by noon on April 12 and must be accompanied by a 2.5% bid deposit.
The auction is expected to take place on April 16 and a final sale hearing is slated for April 20.
We doubt very much if this will now get picked up as a surviving Footaction entity. There are few strategic reasons for another retailer to pick this up, but the groundwork could have certainly been laid out for such a deal during the original sale process conducted by Credit Suisse First Boston. After all, the discovery process then would have identified the stores that were the primary barrier to any purchase and those stores including the JFF deadweight leases have already been liquidated. What any buyer gets now is a nice profitable business with strong brand cache in the market, assuming they keep the floor fresh through May when the Nike agreement runs out.
Foot Locker is certainly a candidate here as they are one of the few that could run this as a stand-alone business and augment there current position in the mall.
Obviously, Nike would need to support a move that would ensure that key marquee product continued to flow (and maybe increased) into the Footaction stores even if the Foot Locker and Champs stores dont see the same level of support just yet.
The prospect for an MBO or a financial play has lost some probability due to the Nike dispute and any investor here would want assurances that Nike would support the new business. That could be tough with Neville now gone.
No, we see this more likely as an auction where each door is bid on based on its importance to the buyer. Finish Line has already indicated that 191 of the 353 doors dont overlap with their existing stores. In their Q4 conference call with analysts, FINL chief executive Alan Cohen said that they will look at the assets and evaluate the level of interest.
Cohen went on to say that their own growth strategy has them focusing on Florida, the I-95 corridor and the West Coast, areas we note have pretty strong concentrations of Footaction stores.
Foot Locker may find some gaps in their own portfolio, but they have a much more mature business in the mall with far more overlap with Footaction.
SEW has spoken with a number of independents that also see more of a parochial opportunity for their businesses and may take a swing at three to five stores each where it makes sense. We know that a couple of these guys that are focused on the urban consumer are already looking at expansion down the East Coast and into the Southeast. For instance, Footactions number one urban store is in the Eastland Mall in Charlotte, NC, which is also home to every other national chain. Will that square footage disappear or will someone see the opportunity?
Regradless, the vast majority of this square footage will not disappear. For Nikes part, they will probably see the majority of theses stores go to someone that will continue to use Nike in a leadership role in product. We would expect that the stores may well re-emerge with a stronger commitment for marquee goods unless they get picked up by a mid-market player. The upside for other brands is quite apparent as well. The Footaction relationship with Reebok was not always the best in recent years and others saw less opportunity with such a high focus on Nike at Footaction.
>>> There has been speculation on Nikes role in this sale and what they could — or should — have done to prevent it. Footstar CEO Dale Hilpert needs to take some responsibility here as well for mismanaging the relationship with their largest vendor to a point that would have forced action. Somehow, this all looks like it is moving along a plot line that was laid out months ago…
