Sports Direct has provided a brief AGM trading statement which merely confirms that trading continues to be in line with management expectations, and that the financial position of the group is unchanged. They continue to target an Underlying EBITDA target (earnings before interest, tax, depreciation and amortisation) of £420m for the current year, whilst operationally, the focus is upon rolling out large format, city centre stores and expanding the Shirebrook distribution centre. The shares have opened with a rise of approaching 1%.
Key Highlights from the full year results, announced in July 2015: Sports Direct has announced full year results which show 21% growth in underlying profit before tax, to £300m driven by revenues almost 5% higher and an increase in retail gross margins.
Whilst usefully ahead of consensus forecasts, the lack of any major strategic news to accompany the results has seen the shares drift lower by a percent or so in early trading.
Sports Direct is a controversial company, which spends too much time in the headlines, for too many of the wrong reasons. Founder and Deputy Chairman, Mike Ashley is a mercurial individual who is unafraid of stepping on toes. The group is vilified by the trade unions for its use of zero hours contracts for some employees. Those same unions ignore the fact that the company is one of the most generous rewarders of staff, as the latest announcement of the award of shares worth over £150m to 2,000 staff under an incentive scheme illustrates.
Corporate strategy can be bewildering, with the group having taken stakes in companies ranging from Debenhams to Tesco and even Adidas. Relations with City analysts have not always been smooth and it is fair to say the group arrived on the stock market a few years ago, not fully prepared for life as a public company, as major profit warnings proved shortly afterwards.
Time has passed and despite all the headlines and name-calling, Sports Direct has grown like Topsy. OK, Topsy may not have been to finishing school, but she has become the dominant player in UK sports retailing, with a growing European presence that has the potential to drive growth for years to come
Sports Direct has been an all conquering behemoth in the UK, destroying rivals like JJB through a relentless focus on value right across the piste. Although the stores, jam-packed with product may give the impression of a jumble sale in full swing, they do offer a very comprehensive range of sporting clothing and kit.
Crucially, they offer it at prices that are often jaw-droppingly good value.
This focus on value has proved a winner and Sports Direct is taking its format to Europe, initially through acquiring local operators, then via subsequent organic expansion. They will not have the territory to themselves, for Decathalon and others are there too, but the format has proven a winner at home and sports kit is often the same, wherever you find it, unlike fashion retailing.
The group has generated a lot of cash. In 2008 net debts were approaching half a billion pounds. Today they stand at £60m and cash profits (EBITDA) have more than doubled. The group pays lots of tax, with the effective tax rate having been 23% or more each year since listing.
Controversies about stakebuilding, or zero hours seemed to contribute to a de-rating of the business in the last year or two. Having been rated in the low 20s, in terms of forward PE, on a par with other pan-European retail names like Inditex, or H&M, the stock now trades on a forward rating of 16x, dearer than some retailers, but well below its own peak levels.
European growth has been lack-lustre too, following a poor ski season in a business that is big in Austria. Mike Ashley can't make Newcastle football club (he owns them) win football matches, and he certainly can't make snow fall on demand. The Toon Army may not forgive the former, but investors should not hold the latter against him.
If European growth can be boosted and if Sports Direct can find acquisitions to use the substantial fire power within the balance sheet (where net debt to EBITDA is just 0.2x) then the stock could offer the prospect of a re-rating back toward previous levels. The company has set targets for future growth in EBITDA which wil determine the level of future staff incentive awards. Historically these have proven effective in motivating managers to help deliver growth. Investors should be aware though that Sports Direct has a long standing policy of not paying dividends, preferring to reinvest cash flows into the business.
- Sports Retail gross margin increased by 170 bps to 44.6%
- Underlying profit before tax up 21% to £300m
- Underlying free cash generation of £301.8m
- Sports Retail like-for-like stores gross contribution increased by 7.4% (FY14: 10.5%)
- Net debt decreased to £60m
Dave Forsey, Chief Executive, said:
"The Group has delivered another solid set of results in spite of challenging trading conditions including the adverse impact on performance during the period of England's early departure from the FIFA World Cup in Brazil and unseasonably mild weather during Autumn, reducing footfall.
The group is continuing to invest in expansion, with a further 700,000 sq ft of warehousing and HQ space being added to the vast Shirebrook campus.
Large format stores of 50,000 sq ft or more are being opened in key cities, with London now trading from the former HMV flagship on Oxford Street and Glasgow and Leeds following.
The group purchased 25 former LA Fitness gyms to start a new fitness division.
Online sales rose by 14% to 16.5% of the Sports Retail total. Overall Sports Retail sales were up 5.5%, driven by UK growth, offset by a weak ski season in Europe. Gross margins were particularly strong in H2, rising to 44.6% (2014: 42.5%).
Premium Lifestyle chains, the division which incorporates USC, Republic Flannels and other premium fashion retail formates saw a 3% decline in revenues as the group closed loss-making stores within the acquired businesses to focus on stronger sites. Margins dropped 150 bp reflecting legacy stock which was cleared online.
The international portfolio rose modestly, by 9 stores to a total of 221, reflecting a lack of acquisition activity. The group trades in 210 European nations and has begun rebranding some stores from their local names to SPORTSDIRECT.com and it will also begin to use the Lillywhites brand on the largest stores.
Commenting on the outlook, Mr Forsey added:
"Trading since the period end has been in line with management expectations and will continue to be driven by improvements in product range and availability, optimisation of both our in-store and web offerings, the introduction of Click and Collect in the UK and further investment in our store portfolio."
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