Acquisitions and expansion inflate SDI sales

Several acquisitions, expansion into two more European countries and an open dispute with a heavyweight in the industry: all in the same fiscal year for Sports Direct International (SDI), the British and increasingly European sports retailer and supplier, which has again delivered sizable increases in both sales and profit for the full year up to 27 April 2014.

The entire group's sales advanced by 23.8 percent to £2,706 million (€3,426.84m-$4,615.66m) for the year – even though it faced a tough comparison with the previous year marked by the London Olympics and the European football championships. Its gross margin advanced by 1.8 percentage points to 42.7 percent and its underlying Ebitda jumped by 15 percent to £331.1 million (€419.31m-$564.77m) (before costs of the group's employee bonus scheme). SDI ended the fiscal year with net profit of £179.6 million (€227.45m-$306.36m), up from £151.7 million.

The performance was driven by the company's sports retail division, which lifted its sales by 24.1 percent to £2,274 million (€2,879.91m-$3,879.00m) for the year (U.K. and international retail sales are no longer reported separately). Its turnover climbed by 25.5 percent to £1,138.3 million (€1,441.63m-$1,941.88m) in the second half. It was aided by the acquisition of Sports Eybl & Sport Experts in Austria (51 percent bought in June 2013 and the remaining 49 percent in March), and a 60 percent stake in Sportland International Group (SIG) in the Baltics last August. SDI started by integrating the Sport Experts stores and has begun to do the same with Eybl, to operate with the same stock management platform. All of the stores are to be rebranded as Sportsdirect.com.

SDI's store count increased by 22 to 418 in the U.K., 401 of them trading as Sports Direct. These British stores had a joint surface of about 4.5 million square feet, up from 4.0 million at the end of the previous year. The acquisitions added 135 stores in Austria, Germany, Estonia, Latvia and Lithuania. The retailer had 112 other stores outside the U.K. at the end of the fiscal year, up from 102 (excluding Ireland and Iceland, where SDI works with associates). While it closed one store in Belgium and another in Cyprus, Sports Direct moved into two new countries: Poland with seven stores and Spain with just one store. Four more stores were opened in the Czech Republic and Hungary, two in each of these countries. The company is aiming to open ten to 15 new stores for the current fiscal year.

At the same time, the performance last year was supported by more abundant sales in existing stores. Comparable gross contribution of the sports stores (a measure provided by SDI on the basis of 339 stores open for two full years) increased by 10.5 percent for the year. This measure excludes online sales, which jumped by 26.8 percent to make up 17.1 percent of the company's sales, up from 15.0 percent the previous year. This rate of online sales excludes the sales of Eybl and SIG, but it would still have reached 15.1 of sports retail sales including them. Just as tellingly, customers outside the U.K. accounted for 46.5 percent of online sports retail sales, underlining the growing recognition of the retail brand across Europe.

The company has also been upgrading the technology of its online store, to support multiple language and currency options, as well as easy mobile access. The group has calculated that about 25 percent of visits to its online store are made by mobile devices. The website should be further enhanced this year with an improved search facility. Another function, click and collect, should be implemented in the U.K. in the coming months, while online gift cards and credit facilities are also in the works.

This surge in online sales is supported by the group's huge distribution center in Shirebrook. The company is preparing another expansion of the site with the construction of an extra 600,000 square feet of warehouse and office facilities. Works should start in September, for the project to be completed toward the end of next year.

The gross margin of the sports retail division increased by 2.6 percentage points to 42.9 percent, after a rise by 2.8 percentage points to 42.5 percent in the second half of the year. The company attributed this progress to its strategy to provide a wider range of price points and branded products.

Operating costs for the same division inflated by 36.8 percent to £656.3 million (€831.34m-$1,119.76m), but excluding the impact of the acquisitions they would have increased by 16.3 percent. The rise was smaller in the second half, with operating costs up by 12.3 percent to £283.6 million (€359.25m-$483.87m). Store wages jumped by 37.5 percent for the entire year, but as a percentage of sales they increased by 9.3 percent. The sports retail division's underlying Ebitda reached £321.3 million (€407.00m-$548.18m), an increase of 23.6 percent for the year, or 20.2 percent without the acquisitions.

Meanwhile, the premium lifestyle retail division saw its sales inflate by 49.4 percent to £214 million (€271.08m-$365.11m) but this was mostly due to the acquisition of Republic in February 2013. Online sales soared by 57.6 percent to £37.5 million (€47.50m-$63.98m). The division's gross margin dipped by 3.5 percentage points to 40.3 percent, due to clearance of old stock. Underlying Ebitda for the division amounted to a loss of £20.4 million (€25.84m-$34.80m). It was blamed on restructuring costs and store closures at Republic, which should start to pay off in the next fiscal year.

When it comes to the brands division, its sales improved by 4.1 percent to £218 million (€276.13m-$371.93m). The turnover generated by wholesale amounted to £185.2 million (€234.59m-$315.96m), which was an increase of 3.9 percent for the year. It was driven by the U.S. market, which made up 39.4 percent of wholesale turnover. Licensing revenues climbed by 5.2 percent to £32.3 million (€40.91m-$55.11m). SDI signed 84 new license agreements, with minimum contracted values of $50.7 million over the life of the agreements. At the end of the year the group had no fewer than 427 licensing agreements in place with 273 licensees, with minimum payments of $309 million over the remaining duration of the deals. The focus for licensing in the coming years should be in Asia, North Africa and the Americas.

However, the gross margin of the brands division decreased by 1.8 percentage points to 43.1 percent. Wholesale gross margin deflated by 2.2 percentage points to 33.2 percent, due to the loss of Firetrap wholesale income as well as stock clearance at Gelert, the British camping brand acquired by SDI. Operating costs decreased by 5.3 percent as the company is starting to benefit from the integration of Firetrap and Gelert.

Operating costs for the entire group were up by 35 percent to £826.1 million (€1,046.43m-$1,409.37m) but this was mostly attributed to the acquisitions in Austria and the Baltics. Without them, operating costs would have increased by 19.7 percent. They would still have risen as a percentage of sales, by 1.9 percentage to 29.7 percent, due to provision reversals in the prior year and the cost of Republic for a full year.

So far in the current fiscal year, the performance has been mixed, weighed down by the early exit of the England football team at the World Cup. The group is still very confident of reaching the Ebitda target of £300 million (€380.04m-$511.83m) (before the costs of employee bonus schemes) for the current fiscal year.

Separately, after a two-year battle, SDI shareholders agreed earlier this month to let the company's founder, Mike Ashley, take part in a bonus scheme worth about £180 million (€228.04m-$307.09m) at the current share price. However, the company's majority shareholder informed the board a few days later that he did not wish to be awarded any shares after all, nor did he expect any other schemes to be proposed for him in the same period.

The 2015 Bonus Share Scheme was approved by a majority of independent shareholders at an assembly on July 4. Under the scheme, 25 million shares were to be issued to Ashley as well as other executives and about 3,000 other employees. The shares are to be paid out in 2019 and 2021 if profit targets are achieved between 2016 and 2019.

It was the third time in two years that the independent shareholders were requested to approve the scheme. While Ashley himself was not allowed to vote, only about 60 percent of the votes had been in favor. The company's non-executive chairman indicated that Ashley's decision to pull out of the scheme may have been prompted by “unhelpful speculation” surrounding Ashley's potential allocation as part of the scheme. Ashley, who is SDI's founder and formally its executive deputy chairman, is not paid a salary by the company.