The UK’s biggest sporting goods retailer isn’t waiting for the market to turn around. In response to falling profits and an erosion of market share, JJB Sports has cut margins and is introducing new exclusive brands to fight against the competitive inroads of its arch-rival, Sports World International. The moves will hurt profitability in the short term, but the company has already seen promising increases in sales volumes.
In the 52 weeks to Jan. 29, JJB earned a net profit £30.24 million (€43.6m-$54.0m), down a third from the £45.16 million it earned in the 53 weeks of the previous fiscal year. Revenues fell by 3.6 percent to £745.2 million (€1,073.8m-$1,331.5m) . The decline was 2.4 percent if compared with 52 weeks of the prior fiscal year. Same-store revenues were 4.3 percent lower. Sales were adversely affected by the absence of any large soccer competitions in 2005, while the previous year had extra sales of replica kits for the Euro 2004 contest.
Boosted by the recovery of excess taxes paid in previous years, the net income figure masks a bigger decline of nearly 45 percent in operating profit to £34.3 million (€49.4m-$61.3m), against £62.1 million. The decline would have been higher without a change in depreciation policy that reduced that charge by £7.6 million (€11.0m-$13.6m). In addition, operating profits include a one-off gain of £2.9 million (€4.2m-$5.2m) on disposal of property, plant and equipment against a charge of £835,000 in the previous year. All figures for fiscal 2004/05 were restated to reflect the new international financial reporting standards.
JJB’s problems are focused on the hyper-competitive market for men’s apparel and footwear in the UK. Heavy discounting by Sports World – and its resulting gains in market share – forced JJB into a change of pricing policy from October 2005. As a result, its blended gross margin – including high-margin contributions from health clubs – was down to 45.4 percent in the second half of the year, compared with 49.5 percent in the first half. For the full year, the overall blended gross margin dipped to 47.3 percent, compared with 48 percent in the previous year. In terms of the operating results, the operating margin of JJB’s health clubs climbed to 12.5 percent, while the margin of its retail stores fell to 3.5 percent.
Sales of footwear and apparel declined because of lower average selling prices being charged by JJB, in accordance with the general market situation in the UK. In terms of units, its sales of these items increased by between 4 and 6 percent. In contrast with other categories, women’s apparel and shoes as well as equipment held up well. Sports World, with its crowded retail space and emphasis on low prices, does apparently less well in attracting women shopping for themselves or those who are more serious about the equipment, footwear and clothes they use in sports.
While the competition in the lower price ranges is coming also from more and more clothing and footwear retailers, the threat from Sports World has led JJB to undertake more aggressive pricing on lines that the two retailers share. JJB now matches Sports World on nationwide promotions, and in stores where it faces head-to-head competition, JJB deploys selective discounts on other items. The new aggressive pricing policy allowed JJB to reduce inventories of aged stock by almost one-third, which contributed to the lower margins but bodes well for the future.
JJB has also launched an aggressive advertising campaign – “Serious About Sport” – emphasizing running, golf, fitness and bicycles, which will be matched with new merchandising in the stores. To help counter the threat posed by Sports World’s own Lonsdale label, JJB has acquired a UK exclusive to retail Everlast, aimed at the bottom end of the market. To create greater differentiation, JJB has acquired another exclusive, bringing over the hot-selling Under Armour brand from the USA to bolster its offerings for the top end. One year ago, JJB had acquired the European licensing rights for Slazenger branded golf clubs, clothing and footwear.
JJB operated at 438 locations at the end of January, unchanged from a year earlier. But through a combination of store closures and openings of new superstores, the selling space reached 4.4 million square feet, up 3.9 percent from a year earlier. There were 194 out-of-town superstores versus 189 in January 2005, 109 urban superstores (102), and 108 smaller urban stores (123). The number of outlets trading under the icon format increased to 23 from 20, while specialist golf stores were steady at four.
Included in the suburban superstores are 32 combined retail stores and health clubs, which together make up the company’s leisure division. Six of them also offer indoor soccer facilities. JJB opened 11 new combination superstore/clubs during the year just ended, slightly fewer than planned, and it expects to open another 12 in the current financial year. The leisure division revenues were up by 42.2 percent to £89.2 million, but their gross margin dipped to 68.6 percent from 69.5 percent the previous year because of lower margins in retailing. Health clubs themselves recorded gross margins broadly steady at 95 percent. Because new health club openings yield revenue only after a time delay, the company is optimistic about strong top-line growth this year.
The first 11 weeks of the current year has seen signs of a recovery. Retail margins remain under pressure, and the blended gross margin for the company was down to 46.1 percent, compared with 49 percent in the same period last year. But the lower prices contributed directly to a rise in sales of 5.8 percent – up as much as 20 percent in volume for some lines - although the most recent period embraced only one week of Easter selling instead of two. On a same-store basis, sales in the 11 weeks were 2.6 percent higher.
Trading is expected to improve in coming weeks, owing in part to sales of uniform replicas for the football World Cup in Germany. The gross margin of official England shirts is barely 25 percent, providing little by way of contribution. But JJB is also promoting heavily various lines of what it calls “associated” merchandise – apparel, footwear and equipment – which carry the red England cross or the name “England” but don’t require an official license. These products achieve, therefore, substantially higher gross margins. Brazilian team uniform replicas are selling well. Moreover, replica sales for English clubs such as Manchester United, Liverpool and Arsenal are expected to show a boost. The last two and several others in the top of the league plan shirt changes. JJB’s new sponsorship deal with the Glasgow Rangers will contribute to the projected sales increase. The chain has also extended its agreement with Everton to include managing the club’s own retailing.
Online retailing is expected to grow in importance at JJB. Current outsourcing arrangements are being unwound and will be replaced this year with an in-house facility linked to the distribution warehouse at its headquarters in Wigan, in Northwest England. The current level of online sales is equivalent to that of about one superstore, but the company hopes to capture additional sales and margin with an internal offering.
Still hanging over the company is the price-fixing judgment from the UK Office of Fair Trading. The Competition Appeal Tribunal has already reduced the fine to £6.7 million (€9.7m-$12.0m) from the £8.4 million originally assessed. JJB’s appeal will be heard in the Court of Appeals in May. In anticipation of that, the company made a provision of a further £2 million in its fiscal 2006 accounts, bringing the total provisions to date to £3.88 million (€5.60m-$6.93m).
The company’s board is holding the final dividend at 7 pence a share, but to conserve cash it will offer shareholders the option of a scrip dividend, allowing them to get paid through shares if the July 27 annual meeting approves the extraordinary procedure.
