Sportmart, Inc. History

Address:

1400 South Wolf Road
Suite 200
Wheeling, Illinois 60090
U.S.A.

Telephone: (708) 520-0100
Fax: (708) 520-1570

Public Company
Incorporated: 1970
Employees: 4000
Sales: $424.18 million (1994)
Stock Exchanges: NASDAQ
SICs: 5941 Sporting Goods & Bicycle Shops

Company History:

The Sportmart, Inc. chain of sporting goods superstores is the original (and still one of the largest) "category killer" sporting goods retailers in the United States. At year-end 1995, there were 63 Sportmarts operating in the United States, Canada, and Japan, with a total of 16 to 18 new stores expected to open before the company's fiscal year end in January 1996. Sportmart also operates a growing chain of smaller No Contest! athletic footwear specialty stores. After two decades of modest growth focused on the Chicago and Los Angeles markets, Sportmart went public in 1992 and launched an aggressive expansion campaign, more than doubling the number of stores in three years and establishing a presence in Minneapolis, Columbus, Ohio, Milwaukee, San Francisco, San Diego, Seattle, Portland, and Toronto.

In 1957, Larry J. Hochberg co-founded Children's Bargain Town USA, a small chain of toy stores that operated in Chicago, Milwaukee, and Detroit through the 1960s. The Hochberg family were pioneers of the superstore concept, offering large stores stocked with a broad array of brand-name merchandise. At the same time, a similar chain of stores started up on the East Coast. It was named Toys R Us. In the early 1960s, Children's Bargain Town and Toys R Us formed a cooperative purchasing agreement, allowing the two chains to buy in larger quantities and to offer their merchandise at deep discounts. Toys R Us was bought up by the retail giant Interstate Stores, Inc. in 1967. Two years later, Interstate purchased Children's Bargain Town USA, merging the toy store operations. In the early 1970s, however, Interstate went bankrupt. The chain of toy stores continued under the name Toys R Us, and eventually won over 25 percent of the huge U.S. toy market.

Hochberg remained with Interstate for about a year after the merger. However, he left Interstate in 1970 to found a new company. Together with Sanford Cantor, who had worked with him through the 1960s at Children's Bargain Town, Hochberg decided to try the superstore concept in the sporting goods market. As he told Crain's Chicago Business, "It seemed like the sporting goods concept ought to be all right. That's about as scientific as we got."

The first Sportmart opened in 1971 in Niles, Illinois. It was the first category killer to enter the sporting goods market, which was then a relatively minor category of the retail marketplace. Hochberg remained close to his toy store strategy, offering a broad range of first-run, name-brand merchandise at prices kept low by volume purchasing and quick inventory turnover. Hochberg's timing was perfect; the sporting goods market, spurred by the increasing presence of televised sporting events and a turn in the national mood toward a new awareness of health and fitness, exploded in the early 1970s. Joggers became fixtures on more and more streets, sparking demand for more sophisticated footwear and apparel.

Likewise, aerobics, merging with the suddenly popular disco sound, emerged by the late 1970s, while skiing moved from an elite pursuit to an affordable sport. The 1970s also saw the appearance of lightweight, multi-speed bicycles, as well as sturdier and swifter rollerskate designs, and more sophisticated weight-training apparatus. Environmental concerns swept the nation at the same time, as more medical studies described the importance of physical and cardiovascular fitness in overall health. Before long, exercise became an American way of life. Despite a loss in its first year of operations, Sportmart was posting profits by 1972 and would continue to blossom throughout the decade.

Sportmart's growth was steady, but slow. A second Sportmart opened in Lombard, Illinois in 1973. By 1983 there were seven Sportmarts operating in the Chicago suburban area. In that year, Sportmart expanded to the West Coast, opening its first Los Angeles-area store. Throughout the 1980s, Sportmart continued to expand in these two areas, reaching 13 Chicago-area stores and 11 Los Angeles-area outlets by the end of 1989. In that year, the company generated annual revenues of $187 million in a market that had grown to approximately $12 billion per year, while dominating two of the most important U.S. markets. Sportsmart's original four-person corporate staff had grown to over 100, and the company's payroll totalled more than 2,000 employees. Despite overtures from the investment industry to go public, Hochberg retained private control of the company, funding expansion through working capital and bank debts. In 1987, Hochberg's son Andrew joined the company, followed a year later by Hochberg's son-in-law, John Lowenstein. It seemed certain that the company would remain under the Hochberg family's control.

For much of its history, Sportmart had been the sole superstore in the sporting goods industry, competing against smaller-store concepts such as Morrie Mages and Herman's World of Sporting Goods, as well as department stores like Sears and Montgomery Ward. However, in the 1980s other competitors emerged to contend in Sportmart's niche. Chief among these was the Sports Authority chain, founded in 1987 by former Herman's COO Jack Smith. By then, the retail warehouse concept, begun by the Price Company and joined by such chains as Sam's Clubs and Costco, was nearly a decade old. Smith adapted the warehouse formula to sporting goods, and by 1990 operated eight Sports Authority stores, primarily on the southern East Coast.

Smith dropped plans to take his company public and instead accepted an offer from Kmart to buy out his chain. He remained in place as chairman and president of the new Kmart subsidiary. With massive cash backing from Kmart, the Sports Authority chain jumped to 19 stores in 1991. Four years later, there were 110 Sports Authority stores, including entries into both the Chicago and Los Angeles markets. In 1994, the increasingly troubled Kmart spun off the Sports Authority chain and Smith took the company public. In its five years under Kmart, Sports Authority's yearly revenues skyrocketed from $53 million in 1990 to nearly $840 million in 1995, with forecasts of over $1 billion in sales by 1996.

At the same time, Sportmart faced competition from two other growing superstore chains. Sportstown, Inc., a Georgia-based chain of 14 stores, went public in the spring of 1992., followed by the August 1992 initial public offering of Sports & Recreation, Inc., a 20-store chain based in Florida that announced plans to double in size within two years. Up until that year, the sporting goods superstores had grown in largely separated markets. Beginning in 1992, however, the superstore chains started to compete head-to-head.

In response, Sportmart had no choice but to expand more aggressively than before. By the time Sports Authority announced plans to enter the Chicago market in 1992, that chain had grown to nearly 50 stores, compared to Sportmart's 25 stores, which by then included one store in San Diego. Between 1991 and 1992, Sportmart opened eight new stores, including one in the Minneapolis/St. Paul region and three in the San Francisco Bay area. Sportmart also began an extensive remodeling of its older stores. By 1992, its sales had risen to over $250 million, though net income was down slightly from 1991 to $5.36 million. Sportmart was the fourth-largest sporting goods retailer in the country, with its approximately 0.5 percent of the market equivalent to Sports Authority's, and behind the 1.4 percent of the industry leader, Herman's (Herman's would soon go bankrupt).

Sportmart became the third sporting goods superstore to go public in 1992, with an initial public offering at $15 per share raising $46.9 million. Sportmart sold three million shares, which represented about one-third of the company. Hochberg, who together with his family controlled 89 percent of the company before the IPO, took approximately $21 million raised by the offering as unpaid profits. Another $13.5 million went to pay down debt, and the remainder went to fund Sportmart's further expansion, doubling the number of its stores with three years. By the end of 1992, Sportmart operated 31 superstores. The following year, that number rose to 42, including entries into Seattle and Portland. Sportmart then added units in Minneapolis, San Francisco, Los Angeles, San Diego, and Chicago. In Chicago, Sportmart expanded its distribution center to 142,000 square feet to serve its midwestern stores, and added a 40,000-square-foot distribution center to the 61,000-square-foot facility already operating in Los Angeles. In-store changes included the addition of its "Training Room for Women" boutique to its successful "Cheering Section" boutique, which sold licensed sports team apparel and goods.

In 1992, Sportmart also began development of its No Contest! specialty stores, opening two stores in the St. Louis area. These smaller stores (11,000-15,000 square feet) operated as category killers in the athletic footwear and apparel market, targeting the aged 12 to 25 consumer bracket. Sportmart's 1993 revenues were over $338 million, and net income jumped to about $7.9 million.

Eleven more Sportmarts appeared in 1994, boosting revenues to nearly $425 million. In 1994, Sportmart became the first of the superstores to enter the foreign market, opening in Toronto. Sportmart also became the first sporting goods category killer to enter Japan, with a store in Kagogawa, outside of Osaka. Eight more Japanese stores followed, with an average size of 12,000 square feet. Sportmart's Japanese presence was supported by an agreement with Japanese retailing giant Nichii Company, which posted 1993 sales of about $16 billion. The company also announced a joint-venture agreement with Dovrat Shrem in Israel to open as many as five stores in that country. To fund its growth, Sportmart issued a second stock offering, reducing the Hochberg family's control to just under 60 percent, with Sanford Cantor possessing an added 6.5 percent. By the end of 1994, Sportmart had grown to a 53-store chain, including its newest market of Columbus, Ohio.

Yet Sportmart's expansion seemed to come too late to regain the momentum lost to Sports Authority in the first half of the 1990s. By 1995, Sports Authority had stores in 22 states. It had all but locked up the crucial Northeastern market, and, with deeper pockets than Sportmart, had successfully established itself in the Chicago and Los Angeles areas. When Sportstown filed for Chapter 11 bankruptcy protection in 1995, Sports Authority bought up seven of its southeastern stores. With twice the number of Sportmart stores and twice its revenues, Sports Authority made plans to enter Canada, Japan, and England. Consumer acceptance of the no-frills warehouse store concept, spurred in part by the recession of the early 1990s, also aided Sports Authority's growth. Meanwhile, the mild winter of 1994 cut into Sportmart's crucial winter sales, and the company was further hurt by flooding in California, with about half of its stores still concentrated in that state. Sportmart's policy of saturating its market had led to some of its California stores cannibalizing each other, while some of its older stores were criticized for their tired appearance. Nevertheless, Sportmart received praise for its defense of its territory, and continued to dominate the Chicago market.

In August 1995 Sportmart opened a 26,000-square-foot store in Utazu, Japan, the largest among its nine Japanese stores. In 1996, moreover, Sportmart expected to add to its five-store Canadian presence with ten new stores, including stores in Calgary and Edmonton. The company was still developing its No Contest! concept, as well, which remained at four stores through 1995. Preparations for the future began with the March 1995 appointment of Andrew Hochberg as Sportmart president. John Lowenstein was named to the newly created position of executive vice-president of operations the following month. Larry Hochberg remained as chief executive officer and chairman, and together with co-founder, long-time partner, and vice-chairman Sanford Cantor, continued to control the majority of Sportmart's stock.

Sportmart, Inc. History

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