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Sports Direct - Sale of Dunlop

Nicholas Hyett | 28 December 2016 | A A A
Sports Direct - Sale of Dunlop

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Sports Direct shares rose 2% after it announced the sale of the Dunlop brand to Japan's Sumitomo Rubber Industries, for a cash consideration of $137.5m.

The group says that the move is in line with its aspiration to "become the 'Selfridges' of sports retail". According to the company, management do not currently "have the bandwidth to develop and manage international brands simultaneously", with the sale allowing increased focus on the core UK business, and relationships with third party brands.

Our View

The sale of Dunlop is a bit of a surprise. There's been no talk of thinning the group's own brand stable, which also includes Slazenger and Dunlop. Whether this is just an opportunistic purchase by Sumitomo, which has history with Dunlop , or we will see other brands put up for sale remains to be seen.

However, the mood music, which suggests increasing focus on the UK retail business, is certainly welcome. For years, Sports Direct was an all-conquering giant in the UK, destroying rivals like JJB through a relentless focus on value. That has proven unsustainable and the core business now needs serious attention.

Although it now has currency hedges in place for FY2017, the group suffered additional pain when the EU referendum result sent the pound plunging. Weak sterling made the group's imported products more expensive overnight, and Sports Direct may now be forced to raise prices to recoup the extra costs.

Rising costs aren't the only problem either. Several high-profile employment controversies mean its image has taken a battering. The group labelled staff its number one priority and said plenty of conciliatory things in its half year results, but it also announced that $51m had been spent on a new corporate jet. While it is available for employee hire, it's hardly a perk of the job for those at the Shirebrook warehouse.

Nonetheless we're pleased to see that a change of strategy does now seem to be underway.

By all accounts, major brands had started turning their noses up at the prospect of selling their top products in what increasingly resembled jumble sale conditions. In response Sports Direct has announced a £300m per annum property investment programme. The revamped store estate will place greater emphasis on the promotion of third party branded goods (at the expense of own brands like Dunlop) which will hopefully keep the major brands on side.

Despite throwing off tonnes of cash, the group hasn't offered investors a dividend since 2010 - arguing that the money could be more usefully invested back in the business. While the plans to shake up the store estate are welcome, it's still difficult to see the attraction of a business with falling earnings and a history of unprofitably investing big sums into stake-building in companies such as Debenhams and Findel for no clearly explained purpose.

First half results - 8 December 2016

Group revenue increased by 14.2% to £1.64bn. After stripping out sales from acquired businesses including the purchase of Heatons in the second half of FY16, and the positive currency effect that has boosted the value of the group's international sales, group revenue increased by 4.2%.

Overall, with the majority of the group's sales in the UK and a significant portion of costs linked to the US dollar, weak sterling has had a negative impact on the group. Together with increased provisions against slow-moving stock, currency movements led to group margins to decline by 450 basis points. UK gross margins declined by 610 basis points to 40.2%.

After the GBP:USD rate dropped to 1.19 in October, the group said that underlying EBITDA would be negatively impacted by £15m, and lowered earnings expectations for the full year to £265-285m. Trading conditions remain challenging for the group and full year EBITDA is now expected to be at the lower end of this range.

Over the last 12 months, the group has moved from 684 to 693 stores, and finished the half with 10 more stores overseas and one fewer in the UK. The group expects trading in Europe to remain challenging and the rate of new store openings will therefore slow. Net debt fell to £72m (£99.7m at 24 April 2016), assisted by the sale of strategic investments including a stake in JD Sports.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.