The British sports retailer was in turmoil again this week after it warned investors about worse-than-expected results and its chief executive, Chris Ronnie, admitted that he had lost the 27.5 percent stake in the company that catapulted him into JJB’s hottest executive seat. JJB Sports’ board of directors announced yesterday that it has suspended Ronnie from his duties, pending the outcome of an ongoing investigation being conducted by its legal advisers “into certain matters.”
JJB said that its comparable retail sales for the five weeks to Jan. 11 had declined by 8.0 percent, excluding the Qube and Original Shoe banners, while sales at its health clubs had increased by 8.4 percent. Mixing both, JJB suffered a comparable sales decrease of 6.8 percent.
Worse still, the company admitted that it was faced with extremely difficult trading conditions. It was therefore expecting to suffer a loss before tax and exceptional items of between £5 million (€5.54m-$7.35m) and £10 million (€11.1m-$14.7m) for the full year ending Jan. 25, before any one-off costs associated with its stretched bank facilities. This is expected to include a loss of about £15 million (€16.6m-$22.1m) by the Qube and Original Shoe banners – forming the lifestyle division that JJB has been trying to spin off for several months.
JJB shares took another hammering because analysts had expected JJB to at least break even or to report a profit of up to £10 million for the full year. The retailer’s shares lost 96.4 percent of their value last year as its liquidity issues became apparent, but they had started to recover a little this year, particularly after David Jones, former chief executive of Next, was appointed executive chairman of JJB, replacing Roger Lane-Smith.
Apart from the profit warning, the share slide reflected worries about a perplexing imbroglio around the company’s ownership and management. This came up after Ronnie admitted that he had lost his stake in JJB due to a margin call by the liquidators of Kaupthing, the collapsed Icelandic bank.
Ronnie raised about £190 million (€210.6m-$279.3m) in June 2007 to buy a JJB stake of 29 percent from David Whelan, the company’s founder, which enabled Ronnie to take JJB’s executive leadership. It was unclear at the time who had financed the acquisition. It was only stated that the stake was bought by a joint venture between Ronnie and Exista, an Icelandic financial group that had close ties with Kaupthing.
But it transpired from Ronnie’s admission on Jan. 12 that the stake was placed under a holding company called Guro Leisure, of which Ronnie held 50 percent, and that the buy was financed by a loan from Kaupthing Singer & Friedlander (KSF), the U.K. unit of the Icelandic bank.
Some time last year, KSF exercised its right to reclaim Guro Leisure’s shares in JJB under certain conditions, as part of its loan agreement with Ronnie. By then the stake had been diluted to 27.5 percent due to share issues. The change should have been reported to the London stock exchange within four working days, but Ronnie told the JJB board that he did not know when or under what conditions the shares had been seized.
PricewaterhouseCoopers (PwC), the administrators of KSF’s offshoot on the Isle of Man, informed the JJB board that they held 23.3 percent of JJB’s shares. Separately, the retailer’s own investigations revealed that Ernst & Young, the administrators of KSF, held another 2.8 percent stake. The remaining stake of 1.3 percent was apparently sold to an unidentified buyer.
The investigation into the matter is led by Lazard and Herbert Smith, the retailer’s lawyers. Jones has pledged to get to the bottom of the issue. Reports that Ronnie is also under investigation by the Financial Services Authority could not be verified. Should Ronnie be forced to step down, the manager most widely tipped to take over is Peter Williams, former chief executive of Selfridges, who was appointed executive director of JJB at the same time as Jones’ appointment to the chairmanship.
The share transfer thickens the plot at JJB, which is already under investigation by the Office of Fair Trading (OFT). This watchdog is examining the relationship between JJB and Sports Direct International (SDI), the leading sports retailer and brand owner in the U.K., after SDI acquired several JJB stores and a stake in JJB, at a time when the latter was in dire need of cash.
Amid these disruptions, Jones is carrying out (yet another) comprehensive review of the company’s business, covering anything from product offer to store layout and operating systems.
On the positive side, for the five weeks ended on Jan. 11, JJB managed to reduce its stock by 36 percent compared with last year, while its gross margin was 50 basis points higher. Then again, the retailer had achieved better improvements in its gross margin in earlier trading periods last year.
Meanwhile, the company is still struggling to raise cash to improve its liquidity position. An information memorandum was to be dispatched last week by Lazard, JJB’s financial advisers, to several parties interested in the acquisition of JJB’s health clubs. The group expects to end the financial year with net debt of just under £60 million (€66.5m-$88.2m).
In this respect, the company felt compelled to quell press speculation that it would struggle to satisfy its bankers. JJB announced last month that it had come to an agreement with its three lenders to reschedule some of the reimbursements of its loans. It owed £20 million (€22.2m-$29.4m) to repay a bridging loan from Kaupthing by Dec. 14, but instead obtained an agreement to pay the same sum pro rata to Kaupthing and two other lenders, HBOS and Barclays, on Dec. 10.
JJB described this as a standstill agreement and revealed this week that the deal runs until Jan. 30, but said it was in discussion to extend this deadline. Furthermore, the retailer added that it had agreed to a margin uplift for both the Barclays and HBOS loans, to bring them in line with the terms of the Kaupthing loan. It further agreed to pay fees of about £8.3 million (€9.20m-$12.2m) to the lenders, with payment meant to take place in February and April 2009.