Firearms distributor United Sporting loaded up on guns ahead of the 2016 U.S. presidential election, expecting a surge in sales would follow the election of a Democrat. Then Hillary Clinton lost.
The miscalculation sparked a multi-year decline that has reached the courthouse steps in Delaware, where United filed Chapter 11 bankruptcy on Monday.
When Republican Donald Trump emerged victorious in the election, United was left with lower-than-expected sales and high carrying costs for unsold inventory, Chief Executive Officer Bradley P. Johnson said in a court declaration.
United, which sells an array of outdoor equipment, is seeking protection from creditors while it sorts out more than $270 million of debt secured by liens on its assets, court papers show. The company, whose subsidiaries include Ellett Brothers and Jerry’s Sports, reported Ebitda of $4 million on net sales of $557 million last year—well below its average of $885.3 million in sales from 2012 to 2016.
The company had to discount its bloated inventory to stay competitive, trimming already thin margins, court papers show. It also lost discounts and volume rebates from top vendors as its heavy debt burden pressured the company’s balance sheet.
Some of the company’s lenders balked at Johnson’s explanation of United’s descent into bankruptcy. In an objection filed Monday afternoon, attorneys for Prospect Capital—one of United’s lenders—blamed mismanagement at the hands of its largest equity owner, Wellspring Capital Management.
A few years ago, United was the largest distributor of firearms in the U.S., according to the objection. But Wellspring “cashed out” more than $183 million through dividend recapitalization deals in 2012 and 2013, then appointed fiduciaries who “grossly mismanaged the business and depleted all reserves necessary to weather the storms and the headwinds the business would face,” the dissenting lenders said.
Prospect Capital and other term loan lenders have a lot to lose. The objection states that the second-lien lenders will likely recover “a small fraction” of their $250 million loan.
An initial hearing is set for June 11 at 2 p.m. in Delaware.
United isn’t the first gun-industry player to run into trouble in recent years. Remington Outdoor went bankrupt last year. It didn’t help that Gander Mountain and AcuSport had gone bust, too, and that Dick’s Sporting Goods pulled back from selling firearms, United said.
“The dumping of excess product into the marketplace pushed prices—and margins—even lower,” United said.
Failed Sale
United tried to sell itself this year, hiring Houlihan Lokey in January to find a buyer, court papers show. Multiple parties expressed interest, but United failed to draw an attractive enough offer.
Founded in 1933 as Ellett Brothers, the company had about 321 employees when it filed for bankruptcy. Wellspring Capital Management owns about 60% of of the equity of SportCo Holdings, the parent company of Chapin, S.C.-based United, the declaration shows. Prospect Capital owns about 21% and Summit Partners owns around 13%.
Wellspring declined to comment. Prospect and Summit didn’t immediately respond to requests for comment.
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