June 10, 2019 − SportCo Holdings, Inc. and eight affiliated Debtors (trading as United Sporting Companies, "SportCo" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11299. Chapin, South Carolina based SportCo, a marketer and distributor of products and accessories for hunting, shooting and outdoor sports, is represented by Christopher A. Ward of Polsinelli PC. Further board-authorized engagements include (i) McDermott, Will & Emery as bankruptcy counsel, (ii) Dalton Edgecomb of Winter Harbor, LLC as Chief Restructuring Officer and (iii) BMC Group, Inc as claims agent.
The Company’s petition notes between 200 and 1,000 creditors; estimated assets between $0mn and $50k; and estimated liabilities between $100mn and $500mn. Documents filed with the Court list all of the Debtors' top 30 unsecured creditors as holding trade claims, the three most exposed amongst many recognizable names in gun manufacturing and outdoor sports are: (i) Vista Outdoor ($3.3mn trade debt), Sturm Ruger Rifles ($3.2mn trade debt) and (iii) Magpul Industries Corp ($2.1mn trade debt). Others include Savage Arms Rifles, Bushnell Corp, Smith & Wesson, Garmin USA, Remington Arms and Heckler & Koch.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Johnson Declaration”), Bradley P. Johnson, the Debtors' Chief Executive Officer, detailed the events leading to SportCo's Chapter 11 filing which chronicles a confluence of political, operational and natural factors which have depressed demand and prices for its overstocked products; ultimately leading to liquidity issues and the refusal of prepetition lenders to extend further credit (lender issues particularly troublesome in respect of the Debtors' prepetition ABL facility, which matured on June 7, 2019). In a further insight which may bode ill for the Debtors' hopes of selling its business as a going concern, Johnson cites SportCo's inability to successfully integrate the AcuSport assets which the Debtors bought out of bankruptcy in June of 2018.
The Johnson Declaration provides the following detail as to bottom line impact: "In 2018, USC’s net sales across all distribution channels were approximately $557.0 million, with $531.1 million in net sales for 2017. Despite USC’s strong sales volume, these figures are well below USC’s $885.3 million in average net sales from 2012 through 2016. In line with USC’s decreased sales, its adjusted EBITDA has dropped from an average of $55.8 million from 2012 through 2016 to $4.0 million in 2018."
The Johnson Declaration continues:
"Since 2015, the Debtors have faced economic headwinds and operational challenges that significantly and adversely impacted the operating performance of the Debtors’ businesses, including:
- Industry-Wide Decline Due to an Uncertain Political Climate. In the lead up to the 2016 presidential election, the Debtors anticipated an uptick in firearms sales historically attributable to the election of a Democratic presidential nominee. The Debtors increased their inventory to account for anticipated sales increases. In the aftermath of the unexpected Republican victory, the Debtors realized lower than expected sales figures for the 2017 and 2018 fiscal years, with higher than expected carrying costs due to the Debtors’ increased inventory. These factors contributed to the Debtors tightening liquidity and an industry-wide glut of inventory.
- Excess Inventory Led to Discounting, Which Eroded the Debtors’ Margins. An over-supply of firearms following the 2016 presidential election and the financial distress of certain market participants led to industry-wide sales discounts. The Debtors were forced to lower prices to remain competitive and maintain sales figures, which further eroded the Debtors’ slim margins and contributed to the Debtors’ tightening liquidity.
- The Debtors’ Over-Leveraged Capital Structure Further Eroded the Debtors’ Margins. The Debtors’ high fixed costs under the prepetition credit facilities adversely affected the Debtors’ financial liquidity and required the Debtors’ to stretch accounts payable beyond the Debtors’ customary payment terms. The resulting management of accounts payable resulted in the Debtors foregoing customary discount terms and volume rebates offered by the Debtors’ top vendors.
- Significant Disruptions in the Industry Eroded the Debtors’ Channel Sales. Many of the Debtors’ vendors and manufacturers suffered heavy losses as a result of the Cabela’s-Bass Pro Shop merger, Dick’s Sporting Good’s pull back from the market, and the recent Gander Mountain and AcuSport bankruptcies. Those losses adversely impacted the terms and conditions on which such vendors and manufacturers were willing to extend credit to the Debtors. With respect to the Gander Mountain and AcuSport bankruptcies, the dumping of excess product into the marketplace pushed prices—and margins—even lower. The resulting tightening of credit terms eroded the Debtors’ sales and further contributed to the Debtors’ tightening liquidity.
- Disruptions Caused by Natural Disasters. The recent spate of disastrous hurricanes in the Southeastern United States resulted in decreased demand for firearms and other sporting goods where the Debtors’ sales are disproportionately focused. The reduction in demand caused additional losses for the Debtors and contributed to the Debtors’ tightening liquidity.
In June 2018, the Debtors acquired certain assets from competitor AcuSport Corporation, including the Debtors’ distribution facility in Bellefontaine, Ohio (the 'AcuSport Assets'), in an asset sale approved by the United States Bankruptcy Court for the District of Ohio pursuant to Bankruptcy Code section 363 (the 'AcuSport Transaction'). The Debtors consummated the AcuSport Transaction to realize certain supply chain synergies attributable to the integration of the AcuSport Assets and expand the Debtors’ sales footprint. However, as of the Petition Date, the Debtors have been unable to realize the operational savings and increased sales anticipated from the AcuSport Transaction due to higher than anticipated costs of integrating the AcuSport Assets with the Debtors’ existing distribution infrastructure and maintaining such assets post-integration, as well as lower than anticipated incremental sales.
The lower than anticipated increase in customer base following the AcuSport Transaction magnified the adverse effects of the market factors discussed above and resulted in a faster than expected tightening of the Debtors’ liquidity and overall deterioration of the Debtors’ financial condition.
Given the Debtors’ tight liquidity position in the lead up to these Chapter 11 Cases, the Debtors approached the Prepetition Agents on several occasions seeking amendments to the Prepetition Documents to, among other things, decrease the Debtors’ leverage and improve the Debtors’ financial condition.
Mounting prepetition lawsuits against the Debtors (as well as their directors and officers) detrimentally affected their ability market a sale of the company and otherwise buy and sell inventory in the ordinary course of business. The automatic stay imposed upon the filing of these Chapter 11 Cases will provide a necessary reprieve from litigation to allow the Debtors to focus on maximizing value for all creditors. Importantly, absent a bankruptcy filing, the Debtor would not have the working capital necessary to implement the contemplated wind-down plan because the Debtors’ Prepetition ABL Facility was otherwise scheduled to mature on June 7, 2019 following a short-term extension to allow the Debtors to continue their pursuit of a going-concern sale."
Prepetition Equity
As of the Petition Date, 94.30% of SportCo’s fully-diluted shares were held by three investor groups: Wellspring Capital Partners IV, L.P. (60.58%), Prospect Capital Corporation and certain affiliates (21.16%), and Summit Partners Credit Fund, L.P. and certain affiliates (12.55%). The remaining 5.70% of SportCo’s fully-diluted shares are held by individuals, including current and former members of SportCo’s management team or reserved for issuance under the Debtors’ management incentive plan.
About the Debtors
United Sporting Companies describes itself as "leading the shooting sports industry for 85 years, offering one of the largest product selections in the hunting, shooting, and marine industries. The most knowledgeable sales team in the country supports the broad product offerings of over 85,000 products. Coupled with our best in class distribution facilities, this allows us to provide excellent service to over 30,000 independent retail customers across all 50 states.
Our product selection includes firearms, reloading, marine electronics, trolling motors, optics, cutlery, archery equipment, ammunition, leather goods, sportsman gifts, and a variety of other outdoor sporting goods products."
SportCo operates its business primarily through Ellett Brothers, LLC, a South Carolina limited liability company and wholly-owned subsidiary of United Sporting Cos. (“Ellett”), and four of Ellett’s six wholly-owned subsidiaries: Evans Sports, Inc., a South Carolina corporation (“Evans”); Jerry’s Sports, Inc., a Delaware corporation (“Jerry’s”), Outdoor Sports Headquarters, Inc., a Delaware corporation (“Outdoor Sports”); and Simmons Gun Specialties, Inc., a Delaware corporation (“Simmons” and, together with Evans, Jerry’s, and Outdoor Sports, the “Operating Subsidiaries”). Ellett’s two remaining wholly-owned subsidiaries, Bonitz Brothers, Inc., a Delaware corporation (“Bonitz”) and Quality Boxes, Inc., a South Carolina corporation (“Quality Boxes” and, together with Bonitz, the “Non-Operating Subsidiaries”), ceased operations prior to the Petition Date.
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