Shares in JJB Sports, the U.K.’s second-largest sports retailer, crashed in London today after it unveiled unexpected half-year losses – and the financial situation has apparently grown so tense that JJB’s auditors questioned whether it could continue as a going concern. In spite of firm reassurances by the company, JJB’s shares closed on the London Stock Exchange Friday at 52.50 pence, down by almost 50 percent from their close on Thursday after an drop of almost 65 percent earlier in the day.
The reaction came as a heavy blow to Chris Ronnie, JJB’s chief executive, who acquired 29 percent of the company in June 2007 from David Whelan at a price of £2.75 a share together with an Icelandic partner, Exista. He quickly initiated gutsy moves to revitalize the retailer but had to admit during a conference with analysts today that his timing had been awful, as U.K. retailing suffered a dramatic slump.
Deloitte & Touche claimed that JJB had breached a covenant relating to its £15 million (€18.9m-$27.8m) banking facility with Bank of Scotland and that it had recently negotiated an emergency bridging loan facility of £20 million (€25.2m-$m). Furthermore, the auditor projected further breaches of covenant for the £15 million loan and for another facility of £60 million (€75.7m-$111.1m) with Barclays Bank. JJB sharply refuted that there had been any such breaches, adding that Barclays Bank supported this view regarding the £60 million loan – but most shareholders were apparently unmoved by the statement and continued to sell.
The auditors raised doubts about several issues: the ongoing availability of JJB’s banking facilities, given its alleged and projected covenant breaches; its ability to repay the bridging loan; its ability to raise funds by divesting non-core activities; and its ability to hit its sales and margin forecast. All in all, the auditor felt that these uncertainties “may cast significant doubt on the group’s ability to continue as a going concern.”
JJB retorted that it was in ongoing discussions with Barclays and Bank of Scotland over its loans. Having sought advice from its lawyers, JJB said that the £20 million bridge loan it had obtained from Kaupthing would be repaid through asset sales and from its cash flow. Furthermore, JJB said it was confident that the bridge loan would provide it with sufficient time to review and resolve longer-term financing needs.
The auditor’s warning was inserted in JJB’s first-half result, which showed a substantial deterioration of its performance, with an unexpected pre-tax loss of £9.7 million (€12.2m-$18.0m) before exceptional items, compared with a pre-tax profit of £8.3 million for the same period last year.
Coming amid the U.K.’s retail downturn, Ronnie’s all-out efforts to revitalize the retailer failed to halt a sales slide of 5.6 percent to £344.7 million (€434.9m-$638.2m), combining store closures with a decrease in comparable store sales. The company’s retail division, including JJB Sports as well as Qube and Original Shoe, saw its sales fall by 7 percent to £309 million (€389.9m-$572.1m). This was partly due to the fact that JJB has closed down or sold 96 stores during the period. At the same time, its comparable sales in stores that have been in operation for at least 52 weeks declined by 4.2 percent.
On the other hand, JJB’s retail division did manage to lift its gross margin by 30 basis points to 46.6 percent. Just as Ronnie intended, it reaped higher margins because it sold a larger proportion of brands under its control. It obtained a license for the U.K. distribution of the Champion brand, and is about to seal more such partnerships.
The improvement prompted JJB’s management to proclaim its confidence in the strategic changes initiated last year. They called for a refit of the company’s stores with a more contemporary logo and store layout, which has continued at fast pace during the half-year. The revamped stores showed double-digit increases in comparable sales.
Another leg of the strategy consisted in lifting sales density by providing intensive staff training at a new Training Academy opened at JJB’s head office in Wigan in September 2007. All store managers have now gone through residential training programs.
Meanwhile, the retail division’s operating costs before exceptional items increased by 3.5 percent to £143.8 million (€181.4m-$266.2m). Its operating profit before central costs and exceptional operating items therefore shrank to just £200,000 (€252,400-$370,300), compared with £14.7 million for the same period last year.
Original Shoe and Qube were both under heavy pressure. Original Shoe, which JJB took over from Sports Direct International (SDI), generated a loss of £5.9 million (€7.4m-$10.9m), while Qube lost £700,000 (€883,200-$1.3m). However, management insisted that trading for both banners should improve in the second half, and that they were making structural progress.
As for JJB’s fitness division, it lifted its sales by 7.5 percent to £35.6 million (€44.9m-$65.9m) for the half-year, as it continued to open new facilities. By the end of the half-year it operated from 50 clubs, compared with 43 at the end of July last year. The fitness clubs also managed a comparable sales rise of 6.5 percent. The number of their members jumped to 217,700 in 50 clubs, up from 205,800 members in 49 clubs at the same time last year.
Furthermore, JJB is launching a new concept of fitness clubs located on mezzanine floors above JJB stores. Called Mifit, the concept was introduced in Cardiff in September, offering membership on a monthly basis for as little as £9.95 (€12.55-$18.42). Due to the synergies with the stores below, the profit margin of such clubs is expected to be particularly juicy.
For the half-year, the fitness division’s gross margin rose by 30 basis points to 96.3 percent. However, due to large pre-opening costs for four clubs inaugurated just after the end of the reporting period, the division’s operating profit before central costs and exceptional operating items declined by 17.3 percent to £7.8 million (€9.8m-$14.4m).
Combining the two divisions, JJB’s gross margin firmed up by 90 basis points to 51.7 percent. However, it suffered an operating loss of £8.4 million (€10.6m-$15.6m) before exceptional items, which amounted to £9.3 million (€11.7m-$17.2m). These items included a gain of about £7.3 million (€9.2m-$13.5m) on the disposal of property, with a profit of £8.3 million on the sale of JJB’s Soccer Domes. Another exceptional item was a profit of nearly £2 million on JJB’s sale of its Umbro shares to Nike. JJB bought the shares last October for £26.5 million (€33.4m-$49.1m), as a means to influence Nike’s bid for Umbro, but it ended up selling the shares to Nike at £28.5 million (€36.0m-$52.8m).
With the addition of these exceptional items, JJB just about managed an operating profit of £1.0 million (€1.3m-$1.9m). Still, after financing costs and tax, it ended the quarter with a small net loss of £263,000 (€331,800-$487,000). In view of the paltry results, JJB’s board decided not to pay any interim dividend.
JJB’s performance did not appear to improve significantly after the end of the reporting period. For the full 34 weeks up to Sept. 21 its sales fell by 8.5 percent, including a decline of 4.5 percent in comparable sales in units that have been open for more than 52 weeks. While comparable sales in the fitness division rose by 6.4 percent, they dipped by 5.6 percent on the retail side. On a more positive note, JJB’s gross margin for the 34 weeks increased by 300 basis points.
In the second half, JJB intends to open four out-of-town fitness clubs with superstores, and well as two fitness clubs with superstores and eight stand-alone JJB stores. However, the management refrained from issuing any concrete forecast for its performance in the second half, only stating that it was “extremely cautious” about the current climate, but that it remained absolutely convinced of the validity of its strategy and that management would remain calm and focused.
The JJB meeting held for financial analysts in London turned into an aggressive discussion, as analysts felt that they failed to obtain adequate answers from Ronnie and other members of the management. Some of them were outright furious, describing the situation as a complete shambles.
There was particular concern over the company’s balance sheet, as JJB’s debt rose to £57.6 million (€72.7m-$106.6m) at the end of the reporting period, compared with £24.2 million at the same time last year. This was apparently caused in part by higher-than-expected costs for the acquisition of Qube and the Original Shoe Company, and their outdated stock.
