UK sports retailing may be suffering from declining consumer confidence, but you wouldn’t know it from the first half results of the John David Group. Pre-tax profits rose by 65 percent in the 26 weeks to July 28, reaching £5.33 million (€7.8m-$10.7m). Revenues climbed by 6.2 percent to £250.5 million (€368.9m-$501.4m). Same-store sales were even better, up by 9.4 percent, and profit before tax and exceptional charges jumped by 158 percent to £8.1 million (€11.9m-$16.2m). Net income increased by 63.8 percent to £3,516,000(€5.2m-$7.0m), leading to a rise in the dividend. Moreover, the improvement in sales accelerated in the first eight weeks of the second half. Same-store sales rose 11.8 percent, with the sports fascias climbing 12.3 percent.
The results bring the company a long way from the time three years ago when the current management team took over under the helm of Peter Cowgill as executive chairman. Then the business was in breach of covenants on its borrowings and threatened with closure, as intense price competition, problems in purchasing and poor inventory management drove the company into losses. The company, which Pentland Group controls at 57 percent, is now in a condition where it can look at potential acquisitions or contemplate a further dividend increase for the full year, assuming that current trends aren’t upset in the Christmas selling season. The usually glum and downbeat Cowgill said at a recent analysts’ conference, “There is no dim light I can find to put on it.”
JD is reticent about acquisition plans, but there are one or two possible targets in the UK retailing landscape it might consider. It wouldn’t rule out making a move into continental Europe, where its positioning could find favor. But any move outside the UK or Ireland would be assessed by whether it could be properly managed and controlled. An alternative under consideration is boosting the internet/mail order business.
The latest improvements come essentially from the group’s core sports division and its JD chain of sports apparel and footwear shops, formerly called JD Sports. In the first half the division made up £236.2 million of the revenues (€347.9m-$472.7m), up from £219.5 million, with an operating profit of £10.6 million (€15.6m-$21.2m), compared with £7.4 million a year ago. The division is benefiting from increased marketing and major changes in format, stock management, distribution and relationships with brands.
The focus on marketing has involved linking the JD brand with music and sports in a way designed to target the high-spending, style-conscious segments of the market. While Sports Direct International continues to focus on low prices and JJB Sports moves more toward active participation in sports, JD has successfully carved out a clearly different market position, emphasizing fashion and lifestyle. Together with K-Swiss, JD sponsored a music festival in July in the northeastern English resort town of Scarborough, which attracted 30,000 visitors and developed a sub-cultural buzz. It has now signed up to sponsor the second album by The Paddingtons, a new emerging band from the indie music cult whose debut album reached the top dozen in the charts with little publicity or record-label hype. JD’s advertising is weighted toward music and sports magazines like NME, Four Four Two and Match, as well as high-impact outdoor media.
The marketing link to sports has been bolstered, too, but not by backing big Premiership clubs, as JJB has done. Instead, JD has associated its brand with lower division clubs that have a particularly intense fan base, linking to passionate spectators rather than trying to claim the mass market. Its kit sponsorships include West Bromich Albion, Burnley and Hartlepool United, This approach has allowed JD to increase the marketing of its own private brands. One of them, Carbrini, has featured as the lead commercial on the weekly David Beckham’s Soccer USA television program on Britain’s Channel 5, for which JD is lead sponsor. In the current year, expenditures on marketing are expected to reach £4 million (€5.9m-$8.0m), up from £2.75 million in the year to January 2007, and they could grow further next year.
Private labels are central to the strategy in the JD chain. Carbrini and its other exclusive brand, Mckenzie, represented 25 percent of apparel sales in the first half, compared with about 18 percent a year ago. They can achieve gross margins six to eight percentage points higher than those of large brands like Adidas and Nike, and the shift helped boost the company’s overall gross margin to 48 percent in the first half, compared with 47.4 percent in the year-earlier period. The management is targeting a 50 percent margin, though it may not make that level in the current year. Mckenzie now outsells all other brands in the chain for both men’s and women’s clothing.
Focus on major brands is also paying off. JD now operates Adidas stores-in-store in 22 locations, with more to come. JD acquired an exclusive UK license for K-Swiss apparel, due to be launched next spring, and it is placing greater emphasis on brands where it can achieve exclusive distribution agreements for premium models, and on high-level brands such as Fred Perry, Lacoste, Ecko and Converse that won’t sell through “value” retailers like Sports Direct or discounters.
The changes in merchandise have been accompanied by changes in format and distribution. JD has refurbished more stores, and while the program isn’t quite complete, capital spending will start to decline next year. The emphasis has been on making stores less cramped, and in some cases it has deliberately moved to layouts where the local stores operate on significantly lower stock levels. Particularly in the southeast of England, with its high population density, and large stores in London and the Bluewater super-mall, other stores have been able to move to daily deliveries, allowing more floor space to be freed up for selling and less for stock. The important Oxford Street store is scheduled to reopen in November, in time for Christmas selling, after a major rebuild that will help better showcase merchandise and brand relationships.
These changes meant that the company has been able to reduce further its inventory levels. Stocks were £56.17 million (€82.7m-$112.4m) on July 28, £4.5 million higher than at the end of the last fiscal year but about £6 million lower than a year earlier. This area offers little scope for further improvement, however, as there is little aged stock remaining in the system, giving JD a clear shot at the Christmas season without the burden of shifting old merchandise in pre-season sales.
Not all is rosy, however. The fashion division ran at an operating loss of £2.2 million (€3.2m-$4.4m)in the first half. That’s down from £3.0 million last year, while sales declined to £14.3 million (€21.0m-$28.6m)from £16.4 million. Fashion – which consists of the Scotts chain it acquired in December 2004 – is getting better, but it continues to be enough of a drag on the group, potentially triggering some radical decisions. Although Cowgill doesn’t regret the acquisition and would do it again in the same conditions, he has decided to put the group’s chief executive, Barry Bown, personally in charge of sorting out the problems. Cowgill isn’t optimistic about being able to sell it in the current malaise in retailing, but the management is sufficiently discouraged about the prospect to entertain offers. And if the new effort to breathe life into Scotts doesn’t succeed, the division could well be sold or closed.
The reorganization program isn’t quite complete throughout the group and some stores are still underperforming. Few if any JD stores make a loss now, but there could be further store closures or relocations this year and next. Pre-tax and net profits were hurt by a £2.75 million (€4.0m-$5.5m)charge for restructuring costs, compared with a small exceptional gain a year earlier. The breakdown of the write-downs reveals that the company also had an exceptional gain of £1.9 million (€2.8m-$3.8m) when it disposed of the lease on a superstore in Glasgow that had been a millstone. The yield was good enough for JD to reverse part of the impairment charge it had previously taken on the 22,000-square-foot store, which was completely out of keeping with the identity of the group.
The sports division finished the first six months of the financial year with 352 stores and a total of 1.09 million square feet, compared with 362 units and 1.10 million sqft. on Jan. 28. Fashion is now operating from 40 stores, down from 44, and on 111,000 sqft., down from 117,000.
