Jul 20, 2017
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Sports Direct profits plunge, inks Asics deal, premium ops and new-gen stores outperform

Jul 20, 2017

The big headline story that most news media will pick up on as they pore over the Sports Direct results for the year to April 30 is its profits plunge. And that’s no surprise given that underlying pre-tax profit dived by 58.7% to £113.7m as currency movements, higher depreciation charges and “strategic challenges” in Europe took their toll.

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Also looking grim, the company’s net debt almost doubled to £182.1m from £99.7m a year ago. Margins were hurt across the board with the main margin down from 44.2% to 41.% due to currency headwinds and an “increase in provisioning for stock obsolescence”. Even the relatively buoyant Premium Lifestyle unit's gross margin dropped from 42.1% to 37.6%, due to markdowns. Ouch.

All of this looks pretty bad. But is there any better news behind the headlines?

Yes there is. For a start, sales are still rising and multi-brand activities are proceeding as controlling shareholder Mike Ashley’s ambition to make the “Selfridges of sports retail” continues. The company is opening revamped flagships and these are outperforming the rest of its store estate.

Also, revenue at divisions like Premium Lifestyle and International Sport Retail is rising at a much faster rate than at its core UK Sport Retail unit, with the Premium Lifestyle brands USC, Flannels, Van Mildert and Cruise, being helped by strong online sales.

And the company has some interesting developments ahead. There’s a new strategic partnership with Asics that aims to make the most of demand for running shoes via dedicated Asics spaces in the company’s flagships from next year (more of that later).

It has named a new CFO too. The appointment of Jon Kempster, who has a wealth of experience in public companies and multinational organisations, suggests it’s getting to grips with some of the corporate governance issues that have seen it being heavily criticised in recent periods.

And it also managed to book a £79.9m exceptional profit on the disposal of the Dunlop brand last year.


But it’s  clear the group has some big challenges ahead of it as it works to regain the growth star status it once had.
So let’s look at those results in detail. Group revenue rose 11.7% in the year to £3.245bn. But while UK Sports Retail revenue (which includes Heaton's Northern Ireland sales) increased by 6.3% to £2.136bn, if the financial year’s 53rd week and acquisitions are excluded, revenue was up just 2.6%. And on a comparable basis it rose a barely noticeable 0.3%. That’s bad news as it accounts for two-thirds of total group takings.


As mentioned, International Sports Retail revenue did much better and increased by 38% to £665.6m, including Heaton's in the Republic of Ireland. Currency exchange effects and the 53rd week boosted that figure with the currency-neutral 52-week number down to a still-healthy 5.9%, or over 7% with Heaton’s excluded.

But wait, here’s more bad news - International Sports Retail comparable sales were worse than the UK performance with a dip of 0.8%. And while the international performance improved in H2 due to a favourable euro-dollar exchange rate, for the current financial year, the firm’s currency hedging deals are much less favourable.

We’ve already seen that Premium Lifestyle is doing relatively well. Revenue there rose 11.6% to £202.2m on the back of its growth online. But what about the firm’s Brands portfolio? This wholesale and licensing portfolio saw total revenue up by 4.1% to £241.1m. Wholesale revenues rose 2.4% to £201.4m, although margins fell. There was growth in European and US wholesaling and the group said trading in the US market was in line with expectations and now represents around 35% of total wholesale sales.

Licensing revenues in the year were up a stronger 14.1% to £39.7m and it signed 20 new licence agreements and renewed others. Longer term, Sports Direct sees licensing as the key driver of the Brands division's profitability with the key growth areas expected to include Australasia and Asia Pacific.

What did embattled CEO Mike Ashley make of it all? His results statement was far from upbeat overall and he said currency exchange effects will remain a thorn in the firm’s side for the foreseeable future.


But looking on the positive side, Ashley also said the “elevation of [the] retail proposition continues to be a key objective” and the firm thinks it’s well on its way to achieving this as it opens more “new generation and flagship-style stores” to enhance its offer to customers and “further improve our relationships with third party brands.”

He repeated that the business is on course to become the Selfridges of sport and is putting  a lot of faith in the flagship store programme. The firm has invested over £300m in property over the last year, and is “pleased to report that early indications show that trading in our new flagship stores is exceeding expectations.”

Sports Direct also said it is changing its  approach in International Sports Retail and has started “developing more tailored approaches to key local markets, and [has] begun initially implementing this in selected countries.”

Sports Direct/Nike

And then there’s that Asics deal. The company said that the two businesses have inked a new strategic partnership “in response to the ever changing demands of the running consumer in today's sporting goods marketplace.” They’ve been talking for several months “on how best to serve runners” with the result being a relaunch of Asics’ statement product offer within an Asics managed space at Sports Direct's premium flagship stores.

This should launch in early spring 2018 with the firm saying: “This is an important step in Sports Direct's journey to being recognised as the Selfridges of Sport and aims to build upon the retail brand's most recent positioning as 'The Home of Football' with a renewed focus on another innovative performance sports category with great potential for growth.”

Taking all of this into account, the company said its outlook is optimistic and it aims to achieve growth in underlying EBITDA of around 5%-15% during FY18.

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