Gander Mountain's Bankruptcy Continues to Shoot Down Sporting Goods Industry
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The bankruptcy of one of the biggest sporting goods chains was bound to have an impact on the industry, but the repercussions from Gander Mountain's collapse continue to be felt and Cabela's (NYSE: CAB) second quarter earnings report hint that the ripples are still fanning out.
Domino effect
After struggling for months to stay afloat, Gander Mountain filed for bankruptcy protection in March, saying it wanted to sell the business and close a number of stores. Recreational vehicle dealer Camping World Holdings (NYSE: CWH) ultimately won Gander Mountain's assets at auction, which further fueled the problems Cabela's is experiencing.
Image source: Getty Images.
While the firearms industry has been in a funk since the election of Donald Trump last November, Camping World's chairman and CEO Marcus Lemonis exacerbated the situation by liquidating the sporting goods chain's firearms inventory.
He was highly critical of Gander Mountain's management team and their decision to become "America's Firearms Superstore," and though he wasn't banning guns from the stores he renamed Gander Outdoor, there were only going to be a few dozen stores operating and they'd have a highly curated selection of guns on hand. All that inventory being sold off at deeply discounted prices has walloped the market.
Gun manufacturers like American Outdoor Brands, which owns the Smith & Wesson firearms brand, and Sturm, Ruger, have been slowly coming to grips with the decline in demand and the weakened pricing environment caused by the election and Gander Mountain's bankruptcy, which is pulling sales forward.
A heavy crutch to lean on
Cabela's generates nearly half of its $4.1 billion in annual revenue from hunting, shooting sports, and accessories, and like the successive quarters before it, the firearms segment bore most of the responsibility for the retailer's poor showing.
Total revenues were down 4% with retail store sales down 6.7% from the year ago period as comparable store sales plunged more than 9%. CEO Tommy Millner pointed to Gander Mountain's bankruptcy and liquidation as the proximate cause of its woes. Along with tragic events such as the Pulse nightclub shooting last year that helped drive gun sales higher in the year-ago period, Millner said, "This slowdown was even more pronounced in the second quarter due to the impact of inventory liquidation by a major competitor who has filed for bankruptcy."
Similarly, D--k's Sporting Goods (NYSE: DKS), which had hoped to benefit from the bankruptcies of other sporting goods chains like Sports Authority and Eastern Mountain Sports, widely missed analyst expectations in its own second quarter earnings report as hunting sales were weak, along with slack athletic apparel demand. Because of the discount environment everyone is operating in, D--k's promised to be equally promotional throughout the rest of the year to maintain its competitive position, a move likely to hurt everyone's profits.
Image source: Getty Images.
Discounting on a different scale
Cabela's collapse in sales has already prompted Bass Pro Shops to seek one reduction in the purchase price of their merger, and with an October 3 deadline looming before either side can walk away from the deal without penalty, we may see yet another discount sought to keep the deal alive.
Both retailers are waiting for Synovus Financial to gain approval from the Federal Reserve to take over Cabela's World's Foremost Bank operations, which may be slow in coming. When Cabela's and Bass Pro renegotiated their merge earlier this year, the latter chose not to extend the drop-dead deadline any further. Although Bass Pro could walk away from the deal, it may just seek a lower purchase price.
Cabela's has already lost a half-billion dollars from the original agreement, and the Gander Mountain bankruptcy could make the sporting goods retail look as if it's negotiating from a position of weakness and end up costing it that much again or even more.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Camping World Holdings. The Motley Fool has a disclosure policy.