Sport Chalet Finds a Buyer in Vestis Retail Group

 

The 50-store, California-based, full-line sporting goods retailer announced that Vestis Retail Group LLC had signed a definitive agreement to acquire it for about $65 million, including about $13 million in cash and the assumption of $52.5 million in debt. Vestis was created in 2012 by the Philadelphia private equity firm Versa Capital Management LLC to acquire EMS and combine its back-office operations with those of Bob’s Stores, which Versa acquired in 2008.

 

If the acquisition is consummated, SPCH Chairman, President and CEO Craig L. Levra will remain in his position as CEO at Sport Chalet and continue to run the chain from Los Angeles, while reporting to Vestis CEO Mark Walsh, who works from Vestis corporate headquarters in Meriden, CT. Sport Chalet, Bob's and EMS will continue to operate under their separate banners.

 

Versa will also be making a substantial equity investment in Vestis and has lined up a $180 million revolving line of credit it said would provide more than enough to finance the acquisition and fund Vestis’s ongoing working capital needs, which will rise rapidly in coming weeks and months as it takes delivery of inventory for the back-to-school and holiday shopping periods.

 

Creating a  new national player
“Sport Chalet greatly strengthens our position in the active lifestyle and outdoor categories, provides scale from which to grow, and diversifies our geographic footprint,” stated Mark Walsh, who put together the EMS deal, created Vestis and now serves as its CEO. “Sport Chalet is in the midst of a transformation that is making technology and customer service central to its operations. It has made significant strides recently, as evidenced by its market leading position in California, its Action Pass customer loyalty program and its strong mobile sales platform. We believe that Sport Chalet will benefit greatly from its addition to Vestis. With the talent and resources that already exist within the Vestis family, we envision a multitude of programs that will leverage the knowledge, talent, and relationships of our three retail companies to the benefit of customers and vendors alike.”

 

The transaction would combine the purchasing power of three regional chains that together operate 154 stores that generated $800 million in annual sales in 2013 and share many vendors. Bob’s Stores and SPCH, which operates a Team Division, share many athletic apparel and footwear brands in common. Executives said the deal would also help EMS and Bob’s Stores accelerate their digital initiatives. SPCH has spent the last six years upgrading its digital platform to enable omni-channel retailing and a robust customer loyalty program.

 

A combination would also provide both companies much needed geographic diversity. EMS took a major hit to margins from late 2010 to early 2012 when the Northeast experienced two of its driest and warmest winters in decades. SPCH, meanwhile, has been hurt by its concentration in four western states, including Nevada and California, which had the highest unemployment rates throughout the recession. The company also operates in Arizona and Utah. 

 

On Monday, SPCH reported it its comp stores sales declined 3.1 percent in 2013 due largely to the unseasonably warm and dry weather where it operates stores. (See related article this issue.) Lake Tahoe mountain resorts, for instance, experienced their driest and warmest winter in a century. The company also closed four underperforming stores and reported sales at its Team division fell 21 percent due to turn over on its sales staff.

 

When SPCH hired Cappello Capital Corp. last September to scout investors, executives said they were looking for strategic partners who could help execute its strategic plan. That plan includes rolling out its new store format and beefing up digital marketing to drive more traffic to sportschalet.com. The online store already derives more than half its revenue from outside the four states where it operates its 52 bricks-and-mortar stores. SPCH is particularly intent on using the data it is collecting through its Action Pass loyalty program and rapidly growing online sales to expand one-on-one marketing and dial in assortments at the individual store level. Action Pass members spend 65 percent more per transaction at Sport Chalet than other customers. SPCH added 400,000 new Action Pass members in fiscal 2013.

 

“We believe Vestis is the ideal partner given its base of stores in the Eastern U.S. and synergistic vendor relationships, marketing focus and inventory platforms,” Levra said last week. “We believe we will be very well positioned to compete in today's retail environment as part of a larger organization with significant scale advantages and broad geographic reach.”

 

While Vestis still won’t have any stores in the middle or southeastern portions of the country, it will now have 120 stores in mountain states that encompass portions of the Rockies, the Sierra Nevada, the Wasatch, the Appalachians and the Adirondacks. It will be able to negotiate better terms not only with athletic and outdoor apparel and footwear brands, but also with outdoor camping, climbing, cycling, paddlesports and snow sports equipment brands.

 

“It was a brilliant move,” said one source in the outdoor industry. “The scale and the economics of this deal can put them in a highly competitive position.”

 

The deal also appears to represent a vote of confidence in specialty retailing despite widespread concern that the higher cost specialty model is being rendered obsolete by the unrelenting efficiency of Amazon.com and vendor’s own direct-to-consumer initiatives. Eastern Mountain Sports operates one of the oldest climbing schools in the nation, while most Sport Chalet stores include bike and ski shops staffed by certified mechanics and technicians. Some stores include climbing walls and a few offer SCUBA certifications in their own pools.

 

“We are working creatively as we tighten controls for performance at the bottom line,” said Levra. “We are ready for the next step, and we look forward to working with a company like Vestis that understands our customers, our market and our vendors, and has the financial resources to help us grow the business.”

 

Under the terms of the agreement, an affiliate of Vestis will commence a $1.20 per share tender offer for SPCH’s outstanding shares. If shareholders fail to tender at least 90 percent of each class of shares of Sport Chalet on a fully diluted basis, Vestis will lower its offering price from $1.20 to $1.04 per share.

 

Members of the Olberz family, which founded SPCH, have agreed to sell all their shares for 75 cents a share once the company successfully closes the tender offer. In addition, Levra, EVP and CFO Howard K. Kaminsky and EVP of Growth and Development Dennis Trausch have agreed to tender all shares they control at the $1.20 to $1.04 price.
Sport Chalet expects the transaction to close before the end of the calendar third quarter 2014.

 

Cappello Global, LLC/Niagara International Capital Limited acted as Sport Chalet's financial advisor, and Duff & Phelps, LLC provided a fairness opinion to Sport Chalet's board of directors. Sheppard, Mullin, Richter & Hampton LLP served as Sport Chalet's legal advisor. Sullivan & Cromwell LLP served as Vestis's legal advisor.