Dear Mr. Berko:

Back in January 2003, on your recommendation I bought 600 shares of Sports Authority at $16.125 a share, plus commission. A year later, I watched it run all the way up to $44 but did not sell the stock. When it fell to $23 in August 2004 I wrote you and asked your opinion: should I sell the stock, hold the stock or buy 400 shares? You recommended that I buy 400 more shares. I didn’t take your advice but wish I did. Now I’m asking you once again, what should I do? Sports Authority is $32 and I’d like to have your buy or sell or hold recommendation once again. And this time I promise to follow your advice.

G.S., Joliet, Ill.

Dear G.S.:

I can only please one reader a day. Today’s not your day and neither is tomorrow.

I don’t recall receiving a letter about The Sports Authority Inc. (TSA-$33.43). And while I’d like to take credit for that recommendation at $16 in January 2003 as well as the subsequent recommendation at $23 in August 2004, that honor belongs to someone much wiser than I.

Frankly, if you had asked me in 2003 what I thought of TSA, I think I’d have told you to hide your checkbook. So you must have me confused with someone else! But I recommend that you dump those shares faster than a duck can hop on a June bug, because I think the company’s future revenue growth will be tepid as standing tea, and earnings may begin to crash in 2006. TSA operates nearly 400 sporting goods stores in 45 states under the names Sports Authority, Sportmart, Gart Sports and Oshman’s. So with the exception of deep ocean diving helmets and acrobatic airplanes, TSA probably sells every kind of sports equipment known to mankind.

The consolidation in the retail sporting goods industry in the past five years has benefited the company by re-establishing pricing power. Dick’s Sporting Goods Inc. (DKS-$31.30) acquired Galyan’s, TSA acquired Oshman’s, and many of the local but smaller retailers that earn revenues by servicing college, high school, intramural, Police Athletic League and Little League teams have also consolidated their buying power and re-established strong price lines. However, Standard & Poor’s reckons that the past four years of good pricing power will begin to erode and put stress on TSA’s margins. In fact, there are several cities where DKS and TSA are expanding into each other’s markets, and though that’s fine for the consumer, it isn’t good for TSA’s revenues and profits as these two behemoths duke it out.

TSA can’t afford the kind of price war it fought four years ago, when its stock traded at $5 a share. The company doesn’t enjoy the strong margins of its slightly smaller competitor (Dick’s) and is still smarting from management defections and poor financial results from when it tried to integrate Gart Sports. It’s sad, because Gart’s superb management really knew how a sporting goods store should be run.

Some folks won’t shop at a TSA store, because the service is so half-baked and indifferent. The salespeople are not familiar with the merchandise; they really don’t care and rather than wait on customers they mingle in the stockroom and whisper about things that kids whisper about. I know, because I tried to make a purchase at TSA several months ago. So I went to Wal-Mart, where I got fast, efficient and courteous self-service at a lower price. I suspect that Target, which is also a huge vendor of sporting goods, would have the same merchandise at a lower price than TSA or even Dick’s.

TSA has a superb balance sheet, but its operating margin of 3.8 percent and net profit margin of 1.52 percent are really sad. Its low 4.04 percent return on assets and 7.91 percent return on equity are embarrassing for a public company.

I know that CSFB, Friedman Billings, Deutsche Securities, Brean Murry and Thomson Financial have a strong buy on this stock. But I think these Wall Street guys may have been a little pixilated when they reviewed the stock. Things at TSA look good on the surface, but a personal visit to several of their units would have you wondering why merchandise is so poorly organized, and how they can stay in business when the sales force plays “chat” while on the clock. As I said earlier, sell the stock.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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