Chipotle Stock: Why Financial Strength Matters

There are some businesses that contain a capital structure that is doomed from the start. I had that on my mind when I was reading through the Sports Authority bankruptcy which was almost a matter of predestiny dating back to the early 2000s. When Sports Authority was rapidly expanding, it was not using organic profits to fund growth–it was diluting shareholder and filling itself up to the gills with debt to expand the store count.

When competition from Amazon, Dick’s Sporting Goods, and even general retailers turned $25 million profits into losses in the $50 million range, Sports Authority had to shutter underperforming stores. This required upfront cash to handle the one-time fees associated with closing, and also meant that Sports Authority had to enter the interest rate death spiral in which it kept refinancing its debt at higher and higher interest rates while shrinking the store count base that would be capable of delivering profits. By 2016, debts at Sports Authority had mounted to over $1 billion and the annual losses hit the $150+ million range. Creditors refused to budge, and Sports Authority had no choice except to file Chapter 11 bankruptcy and make immediate plans to close a third of its remaining stores. What would have happened if Sports Authority had no debt in the early 2000s, and had hundreds of millions in ready cash instead?

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