Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Amazon’s Latest Victim

The latest victim of the seemingly unstoppable retail force known as Amazon (NASDAQ: AMZN) has been identified. It is Sports Authority, a privately held chain of sporting goods and clothing stores based outside Denver.

Sports Authority is planning to close 140 of its 450 stores—nearly one third of its footprint—in a desperate bid to stave off bankruptcy, The Denver Post reported. The locations to be shuttered include the Sports Castle, a multi-story store in downtown Denver that was a long-standing Colorado institution. The Sports Castle was once the flagship store of one of Sports Authority’s predecessors, Gart Brothers.

The company is saddled with $643 million in debt, and it missed a $20 million interest payment in January, according to The Post. Not surprisingly, Sports Authority is negotiating with bondholders in an attempt to stave off total collapse. Denver-area media was also speculating that Sports Authority’s name will be soon be taken off of Mile High Stadium—the home of the Super Bowl Champion Denver Broncos.

The Sports Castle in Denver's Golden Triangle Neighborhood.
The Sports Castle in Denver’s Golden Triangle Neighborhood.

How Amazon Killed Sports Authority

Sports Authority is only the latest retail institution to fall prey to the three horsemen of the retail apocalypse. The largest and most powerful of those horsemen is Amazon.

Amazon killed Sports Authority the old fashioned way: by undercutting its prices, providing a better selection of products, and giving customers a far more convenient shopping experience. Sports Authority’s business was selling athletic shoes and clothes and sporting equipment at discount prices; in other words, it was a classic category killer.

Category killers are specialist retailers that concentrate on sales of one kind of product, such as sporting goods. They attract customers with a combination of expertise, convenience and low prices.

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Amazon and its Zappos subsidiary can beat Sports Authority’s prices, and they are far more convenient. A person can shop at Amazon without leaving her desk or taking time out from her day.

These attributes appeal directly to Sports Authority’s target customers: busy soccer moms and athletic young hipsters. Those people would rather be spending time with their families or enjoying their favorite sports than shopping. Why take time out from your busy schedule to drive to Sports Authority for yoga pants or hiking boots when it takes less than five minutes to order a pair online?

Amazon’s revenue grew by around 26% in the fourth quarter of 2015, and it was not just Amazon. The Everything Store has been joined by two other formidable horsemen that are imitating its business model. Walmart’s (NYSE: WMT) online sales grew by 8% during the same period. Target (NYSE: TGT) reported that its online sales grew by 30%.

Killing the Category Killers

This hammers chains like Sports Authority because competition between these aggressive online discounters drives down prices. To make matters worse, online retailers are aggressively expanding their inventory. Walmart’s latest generation of fulfillment centers are up to 1.2 million square feet in area and can contain up to half a million products ready to ship.

Sports A

Nor is Sports Authority the only victim of the horsemen; its rival, Finish Line (NASDAQ: FINL); is planning to close 150 of its 617 stores. That move came after Finish Line reported a profit margin of -5.71% and a free cash flow of -$31.41 million on November 30, 2015.

The big boys’ online onslaught hammers the category killers because they operate at a very low profit margin. Amazon can send a chain like Sports Authority spinning into the death spiral by taking just two or three percent of its sales.

The Retail Apocalypse Is About to Get Worse

The carnage in the sporting goods arena is only the tip of the iceberg. The retail apocalypse is about to get far worse because of the sales growth at Amazon, and

The retail giants see that the only way they can generate more sales is to spend more money online, so that’s what they will do. The discount goliaths will build more fulfillment centers and offer enticements such as free shipping to attract even more customers. They’ll also increasingly go after profitable retail niches such as toys, fashion, electronics and small appliances.

Next to feel the heat will be Best Buy (NYSE: BBY), Bed Bath & Beyond (NASDAQ: BBBY) and department store operators such as Macy’s (NYSE: M), JC Penney (NYSE: JCP) and Kohl’s (NYSE: KSS). My guess is that we will see footprint reductions of a scale similar to those at Sports Authority and Finish Line at those retailers possibly as early as this summer. Some of these companies might disappear completely because they have weak brands.

Amazon’s Killing Spree Continues

A related development will be the transformation of some of these brick-and-mortar operations into online brands. One way that will occur will be for online retailers with established operations to buy the brand and simply add its website to their ecosystem. Think how much market share Alibaba (NYSE: BABA) or Target could add by adding to its existing operations.

One thing is certain: Sports Authority will be far from Amazon’s last victim. It is going to leave the retail battlefield strewn with corpses. Smaller e-tailers, hedge fund operators and other scavengers will follow Amazon on its killing spree in order to feast on those corpses.

The retail apocalypse is about to reach its zenith and completely change the entire industry. Smart investors had better get ready if they want to profit from the carnage rather than suffer from it.