City Sports has a new equity partner with big plans to expand the metro specialty sports chain across the nation, a move that may signal the next phase of sports retailing in the U.S. Highland Capital, which acquired an 80% stake in the business and was one of the early investors in Lululemon Athletica, is investing millions to grow the chain rapidly, with plans to nearly triple the number of stores over the next five years.
Terms of the deal were not disclosed. Current management, led by co-founder and CEO Mike Kennedy, president Jeff Connor, and COO Sean Scales will remain. In conjunction with the investment, John Burns and Ted Philip of the Highland Consumer Fund, and Marty Hanaka, former CEO of The Sports Authority and former COO of Staples, will join City Sports' board.
Growing out of a single Boston shop in 1983, City Sports now operates 14 stores in six major cities along the East Coast with about $75 million in sales last year. The acquisition comes as City's Sports' business has been on a roll, with comps climbing 10% in its fiscal year ended in February.
Ultimately, Staples founder Tom Stemberg, who is a venture partner at Highland Capital, told The Boston Globe that City Sports has the potential for up to 300 stores in urban markets across the U.S. “We would like to grow this as fast as we possibly can,” Stemberg said. “The numbers are mind boggling.”
In an interview with Sports Executive Weekly, Burns, a general partner at Lexington, MA-based Highland, said it's too soon to know whether the potential is “300 or 200 or 400.” But the fund clearly sees growth ahead.
“We wouldn't make an investment in any company, City Sports included, if we didnt think there was the potential to be a big national opportunity,” said Burns. “We've done a tremendous amount of work and we think that sticking to the core focus of an 8,000 square foot box focused on these metropolitan consumers, there's clearly an opportunity for a couple hundred of those across the U.S. When you start getting into the bigger numbers, 300 or 400, youve got to start looking at lifestyle centers and areas like that. But clearly over the next five or six years, we'll probably be sticking very, very tightly to that metropolitan base.”
Burns particularly feels City Sport's buyers do a “tremendous job” complementing major brands such as Nike, The North Face and Under Armour with an array of smaller brands. “I dont want to say niche brands, but brands that focus on the core participant,” said Burns. “So whether it's Brooks, Asics or Mizuno in running, a brand like Shock Doctor in equipment, or a triathlon specialist like Zoot Sports, they do a great job of mixing and matching their big brands with the smaller and up-and-coming brands.”
Burns feels that metro fitness enthusiasts “are not generally served by other sporting goods concepts.” Full-price chains such as Dick's SG are largely in suburban areas, focused more on team sports, and cater more to the mom or dad buying for their kids. By comparison, City Sports' customers “are usually end users and the actual sport participant.” Burns also feels City Sports has “a bit more of a lifestyle play as well,” with customers coming to the stores for lifestyle brands to wear around casually as well as for athletic purposes.
“When you think about the broader demographic trends in the U.S., there is a tremendous move afoot toward health and wellness and fitness,” said Burns. “And if you look at some of the trends in sports participation, running is one of the few sports that has steadily increased in participation over the last 20 years and City Sports has a big running presence. Gym memberships is another area that for the most part has seen steady growth, and that's big in cities. So the broader market trends are there for City Sports, and therefore, it creates a pretty compelling opportunity.”
Kennedy told SEW that the sale process was undergoing before co-founder Eric Martin succumbed to a long battle with cancer last fall. The sale was partly driven by the desire of Seacoast Capital, its equity partner since the mid-nineties, to cash out on its investment. But City Sports was also looking for a capital infusion to grow, and Highland's retail management expertise particularly appealed to them.
Kennedy noted that certain stores are generating over $700 per square foot. He also believes the double-digit comp last year in a tough retail climate shows that City Sports urban concept, with its focus on running, triathlon and fitness, is working. “The basic concept continues to drive the business,” said Kennedy. “People in cities are increasingly fitness oriented.”
He agreed with Burns that the merchandising is clicking. “I think we're executing better,” he added. “I think our brands, like Nike, The North Face and Asics are doing a good job and our buying teams are doing a good job.”
Among the chain's recent initiatives was the launch last spring of CS, a private-label technical apparel line to complement its popular City Sports t-shirts. City Sports also just launched an e-commerce site.
Regarding expansion, Kennedy said City Sports hasn't set an agenda to grow the chain, but he didn't disagree that tripling the chain in five years is overly aggressive. He noted that four stores were opened in 2006. “Fourteen is a pretty light base so tripling that would mean we add 28 stores in five years,” said Kennedy. “So that's about five a year, and it wont start like that. It will be three and then five. We're going to grow rationally and intelligently and keep doing what we're doing.”
Burns also expects City Sports will benefit from the Highland team's retail backgrounds. “We like to help out entrepreneurs like Jeff, Sean and Mike execute their concepts, and probably avoid candidly a lot of mistakes the guys on our team have made in their careers.” He also said Highland will continue to look at the sports consumer sector but the focus is on City Sports for now.
“There's a lot of exciting things to come and we wouldn't want to bite off more than we can chew in the sector too soon,” Burns said. “So we're clearly focused on City Sports now.”
