Further to Fall

Further to Fall

Stu Utgaard was the Twin Cities’ biggest dealmaker in the ’80s and ’90s, a master of M&A. Then he made his own acquisition, Sportsman’s Warehouse, and built a single store into a $718 million retail chain. So how did Utgaard wind up buried under $31 million in personal debt?

A 1986 cover story in Corporate Report, a local magazine of that era, called Stuart B. Utgaard “Minnesota’s hottest matchmaker.” The cover photo showed him on the hood of his red Ferrari.

As a mergers and acquisitions broker, Utgaard had the Midas touch. In the 1980s and ’90s, if you wanted to sell a company and needed to find a buyer, Utgaard was the go-to dealmaker.

But in the late ’90s, Utgaard let his M&A business dwindle. He’d made an acquisition of his own in 1996, a sporting goods store in Utah for which he and another broker had had trouble finding a buyer. He built that single outlet into a nationwide retail chain called Sportsman’s Warehouse.

By 2008, Sportsman’s Warehouse had 73 stores in 33 states, including Minnesota. It had 5,300 employees and annual revenues of $718 million. It became the fourth-largest outdoor retailer in the country, trailing only Bass Pro Shops, Cabela’s, and Gander Mountain.

Utgaard’s ambition was to take the company public that year. So a couple years earlier, in 2006, he had turned down an offer (from a private company whose name he doesn’t disclose) of more than $264 million for his ownership stake. That proved to be a mistake. Because last year, Utgaard lost it all.

In March 2009, the highly leveraged Sportsman’s Warehouse filed for Chapter 11 bankruptcy protection. Unlike other notable retailers that disappeared in 2008 and 2009—Circuit City, Mervyns, Linens ’n Things—Sportsman’s emerged from bankruptcy last August. But it did so under new ownership, having liquidated or sold more than half of its stores. Utgaard walked away with nothing.

Today he is personally bankrupt and deeply in debt. He lost $1.2 million on a house in Utah. In his hometown of Star Prairie, Wisconsin, he lost a 3,500-square-foot office building and a parcel of land that had belonged to his family for more than 100 years. His lakeside home near Star Prairie, built seven years ago, is currently assessed at $500,000 less than he owes on it, “so I’m poised to lose about $2.5 million there,” he says.


Utgaard says he is losing roughly $15 million worth of real estate all together, in which his equity amounted to about $7 million. Add in $2 million that he had invested in Sportsman’s Warehouse over the years, and “I’m probably losing $9 million of my own money in this whole deal,” he says. That’s not to mention equity in seven corporate-owned Sportsman’s Warehouse stores for which he personally guaranteed the bank loans—equity now converted into $31 million worth of personal debt.

Sitting in a booth at a Chili’s restaurant in March this year, Utgaard, two months shy of his 65th birthday, is broke, jobless, and wondering how he’ll put four school-age children through college. He’s been trying to generate income by selling $29 paperback copies of The Sportsman’s Warehouse Story, his self-published, by-the-numbers account of the rise and fall of the company.

Still hearty and outdoorsy-looking, with most of his blond hair intact, he is not without hope or prospects. He has a lead on a possible executive job with a private com-pany, and he’s heard from at least one firm that might want him to return to his M&A roots by brokering a sale. But for the moment, he says he is flat-out busted.

How in the world did this happen to a financially savvy guy like Stu Utgaard?


Not Chickenfeed

The family property in Star Prairie, northeast of Stillwater, included the farmhouse where Utgaard grew up. His grandfather started an adjacent chicken hatchery in 1901 in the small town on the Apple River.

Utgaard graduated from nearby New Richmond High School in 1963, then earned a bachelor’s degree in economics from Augsburg College and a master’s in industrial relations from the University of Minnesota.

He went to work for Northstar Industries in 1971, a Twin Cities financial firm where he learned the mergers-and-acquisitions business. That same year, he bought the hatchery from his father, “who continued to work for me until he was about 82.”

When he bought the operation, Utgaard says, it was hatching about 100,000 chicks a year and had one full-time employee. Through most of the 1980s, it hatched 2 million chicks a year and employed as many as 65 people. For years, while he worked for Northstar and later his own M&A brokerage firm, “I’d go out there every Sunday morning, pull a hatch, wash the equipment, box the chicks, and do all the invoices and accounting for the week,” he says.


He had to scale the operation back to about 800,000 chicks a year in the late 1990s, when his duties as chairman and CEO of Sportsman’s Warehouse were taking more time. In 2001, he shut down the hatchery and sold the equipment. “We did it for 100 years and then we quit,” he says simply. But he kept the land until it was lost in the bankruptcy.

Utgaard left Northstar in 1978 to launch his own M&A brokerage. Enterprise Investments, Inc., was a small firm with offices in Woodbury and later in Star Prairie. It never employed more than eight people, and Utgaard says that he always generated more than 95 percent of the revenue himself. But for 20 years, it was a force to be reckoned with.

Enterprise accounted for about 100 of what Utgaard calculates as a career total (including his Northstar years) of 108 M&A deals. They were worth a combined total of more than $1.7 billion in invested capital and earned him almost $25 million in fees.

“You could count on one hand the number of Minnesota brokers who have ever done that,” he says. He concentrated on deals involving small to midsize companies, but Utgaard also brokered acquisitions involving Carlson Companies, MTS Systems Corporation, Deluxe Corporation, and Dow Chemical Company.

In 1984, he helped Minnesota Power of Duluth acquire Universal Telephone of Milwaukee. Minnesota Power called on him again in 1995, and he brokered the company’s $234 million acquisition of auto- auction firm Adesa Corporation. He says that deal earned him a commission that topped $1.5 million, his largest fee ever.


He Couldn’t Find a Buyer

Some of Utgaard’s M&A deals involved sporting goods and outdoor-equipment companies: fishing-lure makers Rapala Normark and Ebsco Industries, Denver-based retailer Gart Companies. In 1993, he was asked to find a buyer for a Midvale, Utah, retailer called Sports Warehouse and its sister corporation, Pacific Flyway Wholesale.

Sports Warehouse sold clothing and equipment for hunting, fishing, and camping. Utgaard explains in his book that it was a profitable business with $8.2 million in sales, 20 full-time employees, and 16 part-timers. The asking price for the retail and wholesale operations together was $5 million.


Utgaard couldn’t find a buyer. Neither could another broker who replaced him on the assignment. In late 1995, the business having grown modestly, the owners asked Utgaard to try again. Several months later, they suggested that he buy it himself.

Why delve into retail when he had an exceedingly successful M&A practice? Utgaard is a devoted outdoorsman. (He’s donating 10 percent of the proceeds from his book to a list of 10 outdoor sports organizations, including Ducks Unlimited, the Mule Deer Foundation, the National Rifle Association, and the Rocky Mountain Elk Foundation.) But the fact that Sports Warehouse sold hunting and fishing supplies didn’t factor into his decision, he says. He had simply reached a point where “I wanted to have a business where if you built it up, there’d be something there after you were gone—an ongoing value.”

Though strapped for cash after a 1989 divorce, Utgaard had connections and understood the concept of leverage. He arranged a $6 million credit line with Norwest Bank Minneapolis, to be secured against the store’s inventory, raised $1 million from friends, and came up with $1 million of his own, most of it in the form of subordinated debt.

On November 1, 1996, he bought Sports Warehouse and Pacific Flyway for $8 million, plus a share of operating income for five years that brought the final price to $12.4 million. A few months later, he changed the name of the retail business to Sportsman’s Warehouse. Pacific Flyway, which had been selling to several outdoor-equipment businesses, would evolve almost entirely into a supply source for Sportsman’s Warehouse.


Leaps and Bounds

For the fiscal year ending October 31, 1997—the first full year of Utgaard’s ownership—Sportsman’s Warehouse showed an operating profit of $1.7 million on sales of $20.5 million.

He allowed his M&A business to “go dormant” in 1998. That was the year he opened the second Sportsman’s Warehouse, in Provo, Utah.

A third Utah store opened in 1999. After that, the growth rate accelerated. By the end of 2002, Sportsman’s Warehouse had 13 stores, including Minnesota outlets in St. Cloud and Coon Rapids. A Woodbury store would open in 2006.

The company bought a corporate jet in 2003, a Raytheon Beachcraft Premier I, and later traded it for a Learjet 60. Chris Utgaard, Stu’s son from his first marriage, became Sportsman’s chief operating officer.


There were 30 stores by the end of 2004, spread from Alaska to New Mexico and east as far as Wisconsin. Net income for the fiscal year was $3.3 million (up 48 percent from the prior year) on sales of $292.6 million (up 55 percent). All but two of the stores had a positive cash flow.

Utgaard won Ernst & Young’s Entrepreneur of the Year Award that year for the Utah region in the retail category. He claims no great merchandising secrets that would explain the company’s success.

Its prices for most products were not dramatically lower than the competition’s, according to trade-press accounts reprinted in his book. Sportsman’s Warehouse made an effort to hire salespeople who were knowledgeable about hunting and fishing, it stocked items that sold for less than a dollar to encourage walk-in traffic, and it tried to create a sense of community at its stores by means such as letting customers post pictures of fish they had caught. But the prime source of rapid, profitable growth appears to have been Utgaard’s talent for securing financing and managing money.

Growing pains first made themselves felt in 2005. Twelve new stores opened during the fiscal year; 10 of them posted losses, as did some stores opened the previous year. Utgaard cites causes including start-up costs, permitting and construction delays, and in the case of six stores, a mistake involving the discount coupons that he relied on as a key marketing tool for launching new outlets.

Sales increased to $415.6 million that year, but net income dropped by 91 percent, to only $293,000.


Open the Pod Bay Door, Hal

Things got much worse in 2006. Fourteen new stores opened that fiscal year, including outlets in Pennsylvania and South Carolina that extended the chain from coast to coast. But for the first time, Sportsman’s Warehouse lost money, posting a net loss of almost $4.4 million on $595 million in sales.

An aborted switch to a different payroll service wound up burning $3.4 million. Some store openings were hampered by blizzards. Start-up costs for the new stores continued to take a toll.

Debt became a serious problem. During fiscal 2006, Utgaard writes in his book, “interest expense consumed almost 72 percent of operating cash flow due to higher borrowings, higher interest rates, and our failure to maximize operating income.”


Of all the problems that arose in 2006, however, the one that Utgaard blames above all for the eventual disaster was a conversion to a new inventory replenishment system, an enterprise resource planning (ERP) software called Oracle Advanced Supply Chain. The switch was intended in part to help the company comply with Sarbanes-Oxley accounting requirements. This would be necessary if Sportsman’s Warehouse were going to go public.

Looking back, Utgaard sounds as if he wishes he had steered clear of ERP systems completely: “Everybody has the same experience with it, and ultimately, I don’t think you even need it. There are ways to do business that are just as good or better.”

Countless staff hours went to entering data into the new system. Inventory problems arose as buyers focused on the conversion. Utgaard says the direct costs of implementation mounted to about $3.5 million, and he estimates lost-opportunity costs of more than $7 million. In retrospect, he says he should have halted his company’s expansion or slowed it to a crawl before attempting to implement the program, which consumed far more time and resources than anticipated.

The first attempt to activate it, in October 2006, resulted in an outright crash. The program finally went up in January 2007, but with disastrous results.

“We couldn’t get it to work,” Utgaard says. “For five months, we basically couldn’t ship anything to our stores.” The stores ran low on merchandise while inventory in the company’s Utah warehouse ballooned. “And even though the stuff is in your physical possession, if you don’t know you have it, you can’t pay for it. Accounts payable didn’t know what to do. So we got behind in payments to the trade,” he says.

In mid-2007, the problem reversed itself—not in the sense that it was solved, just that inventories went crazy in the other direction. “The computer would place the same order for something like hand warmers with four different vendors, and ship four times as much to a store as we needed,” Utgaard says. And the program ignored regional distinctions. It sent crab pots to stores in Colorado and halibut lures to Minnesota.



With his company bleeding money and desperate for financing, Utgaard agreed to a deal in June 2007 with Los Angeles firm Seidler Equity Partners. Seidler invested $50 million for preferred stock in the company, with a 14 percent interest rate and a “put” option that required Sportsman’s Warehouse to redeem the shares within one year of the date that Seidler chose to exercise the put.


Meanwhile, Sportsman’s primary lender, CIT Group, balked at increasing a $225 million credit line. By October 2007, Sportsman’s revolving debt reached almost $237 million. In November, Utgaard got a new $325 million credit line from GE Capital.

Sportsman’s ended fiscal 2007 with a net loss of $9.9 million. Still, due to construction lead times and lease commitments, 10 new stores opened in fiscal 2008, six of them in November 2007. Utgaard began to close the least profitable locations even as new ones were opening; six stores would close in 2008.

The company was still behind on payments to suppliers in the spring of 2008. Unable to find other sources of financing, Utgaard took another $25 million from Seidler in the form of a bridge loan, as well as a $20 million loan from Gordon Brothers Group, a Boston investment firm. Thus Sportsman’s Warehouse was weak and burdened with debt as it headed into what Utgaard calls “the perfect storm,” also known as the fall of 2008, when the American financial sector imploded.

On September 15, 2008, Sportsman’s tripped a covenant attached to the Gordon Brothers loan. That was the day news broke that Lehman Brothers had filed for bankruptcy and that Merrill Lynch would be forcibly merged with Bank of America.

On October 8, Seidler exercised its put option. The concern for its investment was understandable, Utgaard writes in his book, but this “had the effect of converting $43 million of equity into $59 million of debt, and left the company with a negative net worth.”

Sportsman’s Warehouse now owed $84 million to Seidler, short term, at 14 percent interest, and $18 million to Gordon Brothers at 12 percent. With the markets essentially not functioning, there was no way to refinance the debt. Credit was unavailable. Utgaard looked for a buyer instead.

In November, the United Farmers of Alberta (UFA), a Calgary-based agricultural co-op that recently had acquired a seven-store Canadian retail chain called Wholesale Sports, agreed to buy an 80 percent interest in Sportsman’s Warehouse for $90 million. A few months later, UFA changed its mind.

Instead, in March 2009, it paid about $68 million for 15 Sportsman’s Warehouse stores in the northwestern United States and merged them with Wholesale Sports. Sportsman’s began to liquidate 23 of its remaining stores, including the three it operated in Minnesota, and sought bankruptcy protection.


“The Worst Part”

Utgaard says he’s still baffled about why UFA chose to spend $68 million for 15 stores instead of paying $90 million for all 67 Sportsman’s Warehouse stores that were operating at the time, plus a giant Utah warehouse. UFA spokesperson Natalie Dawes says simply that the due-diligence process revealed “it probably was not in our best interest to buy the business outright. When we looked at it carefully, it just didn’t make sense.”

Filing for bankruptcy protection was the only option, Utgaard says. Sportsman’s Warehouse still owed $84 million to Seidler and $18 million to Gordon Brothers. Its lease obligations on 29 closed stores amounted to more than $16 million annually. Suppliers had stopped shipping products. The revolving debt to GE Capital was secured by inventory and, given the inventory woes, GE was urging complete liquidation to recover its money.

Utgaard managed his company through Chapter 11, working a lot of 75-hour weeks, he says. When it emerged from bankruptcy in August 2009, with 26 remaining stores, it was owned by Seidler Equity Partners, which converted its debt claim back to equity and paid the company an additional $12 million in the form of a loan. The retailer’s suppliers had lost nearly $70 million. About 2,000 employees had lost their jobs.

One of them was Utgaard, fired by Seidler just before the exit from bankruptcy. He says he declined a severance offer because it came with conditions that would have prevented him from taking another job he was pursuing. When that opportunity fell through and he asked for the severance package after all, the offer was off the table. “So, another mistake,” he says.

He and his wife have only about $25,000 in retirement savings; they invested heavily in Sportsman’s Warehouse instead. Personal bankruptcy was inescapable in light of an impossible mountain of debt, including the mortgages Utgaard had personally guaranteed on the seven corporate-owned stores.

Nobody but Utgaard himself wants to talk about any of it. His wife, Kim, declined to be interviewed. Seidler Equity Partners did not reply to a request for comment. Neither did Rourk Kemp, former CFO for Sportsman’s Warehouse and one of the good guys in Utgaard’s account. Kemp now works at another Utah business. Utgaard says that current Sportsman’s Warehouse employees—including his son, Chris, who kept his job as the company’s COO—have been forbidden to comment.

Utgaard has many regrets, and the most painful is not the loss of the century-old Utgaard land in Star Prairie. “I think the worst part is what happened to my family—from what they should have had to what they’ve got now,” he says.

Stu Ugaard entered the retailing business to build something that would outlast him. In a cruel and ironic way, it did.