Dec 16, 2019
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Green shoots at HoF and new Flannels stores boost Sports Direct

Dec 16, 2019

Sports Direct had mixed news on Monday as the retail giant’s half-year results showed a number of improvements but also some negatives. For the 26 weeks to October 27, group revenue rose 14% to £2.043bn, the gross margin was up 230bps at 43.8%, and underlying EBITDA rose 21.8% to £181.2m. Meanwhile, pre-tax profit surged 160% to £193.4m and net debt fell almost 50% to £254.4m.

Photos: Courtesy of Flannels, Theo Tzia

But before we get carried away, excluding acquisitions and on a currency-neutral basis, underlying EBITDA rose a smaller 15.1%, although in itself this was a good figure and was helped by improvements in the Premium Lifestyle and European Retail divisions.

Yet there was red ink in there too. The revenue numbers were boosted by acquisitions and if we look at them on a currency-neutral basis and excluding those acquisitions, group revenue actually fell 6.4% “due to the continued elevation strategy”.

Within that, UK Sports Retail (including Sports Direct, USC, Jack Wills and other operations) revenue fell 6.2% to £1.2bn. But without the acquisitions, it fell 8.6%. Premium Lifestyle revenue was more encouraging and rose 79.2% to £282.6bn, largely due to new upscale Flannels stores and a full period contribution from House of Fraser. And that division’s underlying EBITDA improved from a loss of £29m to a loss of £5.6m.

European Retail was up 16.7% to £365.5bn, again due to acquisitions, but fell 61% on a comparable/currency-neutral basis, Rest of World Retail fell 8.5% to £92.1bn, or dropped 12.5% currency-neutral, and Wholesale & Licensing rose 14.9% to £92bn.

That pre-tax profit surge was due both to improved underlying EBITDA and an £84.9m gain (pre IFRS 16) arising from the sale and leaseback of the Shirebrook distribution centre, the Shirebook sale also being behind the net debt reduction.

So clearly, the company isn’t out of the woods yet, but it seems to be relatively upbeat. On Monday, it also played down the impact of the massive Belgian tax bill that came to light some months back, saying it “will not lead to material liabilities and we are committed to finding a resolution as soon as possible”.

Non-executive chairman David Daly talked up the increased underlying EBITDA saying that “in a very difficult retail environment [this] is a fantastic effort” and said that the improved product mix the firm is getting access to is driving higher margins.

He also said the now-fully-integrated House of Fraser is starting to show “green shoots of recovery” and that the Frasers strategy should “create a superior shopping experience for the consumer which will be led by the original Frasers. In the coming months and years, Frasers will prove to be a vital and successful part of the group”.

That Frasers plan starts with the Glasgow store that has operated under the Frasers name for years and the completion of the purchase of the building itself “will allow us to showcase our elevation strategy and intentions for the remaining portfolio of stores”.

Not that House of Fraser overall is having an easy time of it and issues remain around how many of its stores will eventually stay open, but CEO Mike Ashley said the company has brought “an unmitigated disaster into a functioning state”. And he clarified that his earlier statement about the “terminal” nature of HoF related to it pre-acquisition, saying it had been “mere hours from liquidation such was its parlous state, the business was dead, finished, destroyed” at that point. 

The company also said it thinks its Jack Wills buy “will be a great asset to the group, particularly in the House of Fraser and USC fascias”.

And it said something that is likely to be echoed in other company reports following the general election, that “we are hoping that the political waters will be calmer in the coming months which will allow us to move out of this period of market unpredictability. This will enable us to plan appropriately for the future which is critically important”.

The company added that it continues “to have an arms-length supplier/retailer relationship with French Connection”, in which it has a sizeable stake “and we consider this relationship to be strong and working well”. But it also thinks the review of strategic options at French Connection “has gone on far too long, and [we] urge management to reach a favourable conclusion for all shareholders as soon as possible”.

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