Sports Authority: Takeover Rumors Take Backseat to Earnings News

Author:
Publish date:

By Suzanne Kapner
Staff Reporter

Sports Authority

(TSA)

shares spiked last week on takeover rumors, only to give up those gains early Monday after the retailer said it would miss analysts' estimates for the second quarter. But analysts and money managers say that despite the news, the company will remain a top gun in its segment.

Lazard Freres

analyst Todd Slater downgraded Sports Authority on Thursday to a hold from a buy on worries that the company would have trouble meeting earnings estimates for the second and third quarters. But he says the long-term story is intact.

"The earnings downside is short-term," says Slater, who expects business to improve in the fourth quarter. "Sports Authority is the dominant player in its segment. As

other companies in the industry close stores over the next few years, it will consolidate Sports Authority's position." The stock closed down 1 11/16 on Monday at 19.

So what's going on short-term? Slater says the coming six months will be difficult as comparisons pale next to last year's huge sales gains fueled by the

Olympics

, strong products like the

Ab Roller

and benefits from

Herman's

liquidation.

And while Slater says an acquisition is still plausible, he adds that mere rumors don't justify investing at this time. "We believe the run-up may be tied to a

CNN

report which rumored a possible acquirer of TSA at 26 per share," Slater wrote in his report. "This price appears reasonable to us, but it is not, in our opinion, a solid investment thesis." Lazard Freres has done no underwriting for Sports Authority.

Several money managers agree. "I dismiss somebody taking them over," says Kevin Wenk, portfolio manager of the San Francisco-based

Polynous Growth

fund, which counts Sports Authority among its top 10 holdings. "But I do expect by year-end that they will own a good number of their competitors' stores."

Sportmart

(SPMT)

,

Jumbosports

(JSI:NYSE) and

Oshman's Sporting Goods

(OSH)

are considered likely candidates.

Colin Faerenbach, manager of the

Haven

fund in New York, says he is holding his 398,000 shares. "This is a short-term problem," he says of Sports Authority's preannouncement.

The company said it expects earnings for the second quarter to be about 30 cents a share, compared with 29 cents last year. Analysts had been expecting Sports Authority to earn 34 cents a share. In a press release, the company said comparable-store sales are expected to decline 1.5% for the period.

"We'll look beyond that to the big picture," Faerenbach says. "It's a well-run company that is the leader in a consolidating industry."

Among the names of possible buyers tossed about, the one considered most likely is

Woolworth

(Z) - Get Report

. The company is considering scaling back its ailing dime store business, while expanding its more profitable

Foot Locker

division, as reported last week on

CNBC

. "They are the largest player in the athletic segment and they are talking about making acquisitions," Slater says.

Wal-Mart

(WMT) - Get Report

is another candidate, though less likely. "Wal-Mart does have a tremendous amount of cash flow and the ability to make acquisitions," Slater says. "But they would likely be in related businesses than new businesses."

Alexander Stanton, Sports Authority's director of investor relations, says the company does not comment on market speculation or possible mergers.