Mike Ashley, the secretive British billionaire whose Sports World/Sports Soccer chain became the UK’s largest sporting goods retailer even before some minor acquisitions in the British retail landscape earlier this year, revealed last week that it has become Blacks Leisure Group’s largest single shareholder. Blacks is the country’s largest outdoor and boardsports retailer.
After buying small stakes in the public company through derivatives, Ashley has put together a 29.38 percent stake through his main holding company, Sportsworld International. Such an equity interest, revealed in connection with Blacks’ half-year financial report after the announcement that Crédit Agricole had lowered its own stake in the British retailer to below 3 percent, is just below the level needed to make a bid for the balance of the shares, and there is apparently a strong chance that Ashley will go for it.
Ashley apparently took advantage of Blacks’ depressed share value after two profit warnings this past summer and ahead of the publication last week of the company’s depressed financial results for the six months ended on Aug. 31. Nothing could be learnt about Ashley’s real intentions by the time of going to press, but a British newspaper, The Daily Telegraph, said he is very serious this time about his investment in the company.
Executives of Blacks Leisure declined to make any comments. Other investors have reportedly been eyeing Blacks including Baugur, the big Icelandic fund that has invested heavily in the retail sector in the UK and Denmark, and other private equity funds such as Advent and Bridgepoint.
A bid by Sportsworld would be of more strategic value. Ashley’s properties include Karrimor, a rather important outdoor brand for the UK market, and he has been said to be planning the start-up of a surfwear chain of his own, in competition with Blacks’ Freespirit chain. There is nothing to prevent Ashley to make a bid for 100 percent of Blacks, provided he offers a nice premium over its share price, but he may also decide instead to resell his shares at a profit later on, as he has apparently done with previous short-lived minority investments in JJB Sports and The John David Group. Pentland Group stepped in and bought a majority stake in JD,, partly to foreclose a takeover by Ashley, prior to its acquisition of Allsports.
Taking flak in the overheated battlefield of the British sporting goods market, Blacks Leisure just about managed to post a small profit for the six months ended on Aug. 31. Its Millets banner was worst affected, while its Blacks stores and the company’s boardsports business withstood the pressure.
Blacks’ income statement for the 6-month period shows that its sales inched up by 0.9 percent to £141.3 million (€211.5m-$268.6m), but they declined by 0.5 percent on a comparable store basis. The Blacks chain performed strongly, with a same-store sales rise of 4.5 percent, fuelled by higher apparel sales. The boardwear division, comprising the Freespirit chain and the O’Neill retail and wholesale business, for which Blacks has a national license, proved equally resilient with a comparable sales rise of 2.6 percent, helped by the warm weather and the introduction of the Freespirit private label. Actual sales of O’Neill products at wholesale and retail declined because one of the 16 O’Neill stores operated by Blacks in the UK was closed down.
Instead the Millets chain suffered a 5.6 percent sales drop on a same-store basis. The management blamed dry weather in the first months of one of the hottest summers in recent memory as well as the consumers’ interest in the football World Cup, which distracted them from their usual outdoor pursuits. Like Blacks, Millets delivered a comparable sales rise in the area of apparel, but it was annihilated by depressed sales and prices on the camping side.
Blacks Leisure boasted some improvements in gross margins due to broader sales of exclusive ranges, but their positive effect was almost entirely offset by intense price competition, which shaved them off to a small increase of 0.3 percentage points to 55.9 percent. The promotional environment prevailing in the UK shows no signs of abating: last week, a store that we visited just a few yards away from a Millets outlet in the center of Nottingham, for example, was offering outdoor products under a banner reading, “Madness, 90% off.”
The tiny rises in sales and margins did not suffice to make up for an increase in operating costs, which rose by £7.6 million (€11.4m-$14.5m) due to investments in store openings, revamped commercial websites for Blacks and Millets, new electronic payment systems for the cash registers and a new distribution center in Northampton that is concentrating the product flow previously handled by four separate warehouses. Group operating profit was therefore reduced to only £680,000 (€1,917,900-$1,293,800), compared with £7,249,000 for the same period last year. Pre-tax profit crumbled to £75,000 (€112,270-$142,700), down from nearly £6,891,000 last year.
The company’s performance has not been much more encouraging in terms of turnover for the 8 weeks to Oct. 21, where comparable store sales declined by 2.3 percent. The main cause here was again the weather, which was mostly warm and dry in September, and in fact the company’s sales results firmed up in October.
On the other hand, as was the case for its competitors, Blacks’ gross margins are benefitting even more from its increased emphasis on exclusive product ranges such as Peter Strom, Technicals, Rare Species and ALS, which have all received good feedback from the customers. To achieve further improvements in the coming quarters, the company has re-launched the Peter Storm brand for the current Fall/Winter selling season, while Millets has introduced more hard-hitting ranges from Berghaus, Columbia and Craghoppers. To help cope with the greenhouse effect, the group is also planning to come out next summer with lighter apparel products using high-tech fibers to combat the heat.
At the same time, Blacks continues to invest in the development of Blacks’ larger out-of-town stores, and it has an extensive refurbishing plan for Millets. The plan will take five years to be implemented, but in the second half of the current financial year already, 7 Millets stores will be enlarged and refurbished along the lines of a concept store that was opened in Newbury last March, which has delivered 10-percentage-point better results than the other Millets stores so far this year.
As previously reported, Blacks has struck a strategic partnership with Mambo, an Australian surfwear brand, that covers the whole European market excluding Spain. The group recently entered a different retail-only partnership for the UK with Evans Cycles, which opened a concession at a newly opened suburban Blacks store in York.
The group currently operates about 105 Blacks stores, including 11 suburban locations, as well as 285 Millets, 45 Freespirit doors and 15 O’Neill stores. It has launched an O’Neill Syrf Academy at Watergate Bay, while Freespirit has signed a sponsorship deal with the British Surf Federation.
