SDI outperforms

The Chelsea jersey row was publicized by Sports Direct International (SDI) just as it was discussing another impressive performance for the half-year until Oct. 27, with soaring sales and underlying profits – even better than the company itself had predicted.

The entire group's sales advanced by 23.5 percent to £1,345.1 million (€1,606.5m-$2,196.4m) for the six months, although the same period last year had included the European football championships and the London Olympics.

As previously reported, several acquisitions were completed during the period, led by the purchase of Sport Eybl and Sports Experts in Austria, along with the Sportland International group in the Baltic countries. SDI bought Gelert, the British company specialized in tents, as well as 51 percent of Yeomans Outdoors, an outdoor retailer, and the same stake in Robinsons Country Leisure, a leading British equestrian retailer. Pulp, a fashion retailer with six stores, was another acquisition reported earlier this month.

Sports Direct's stores in the U.K. lifted their sales by 13.4 percent to £903.3 million (€1,078.8m-$1,475.0m). The company attributed this to the improved offering and wider ranges in its stores, as described earlier this month, as well as productive relationships with many of its suppliers.

The group had 409 stores in the U.K. at the end of the period, excluding Northern Ireland. SDI still wants to open between 25 and 30 stores in the U.K. this year, and it is continuing to shift to larger locations. While the bigger stores yield fewer sales per square meter, they achieve a better average store cost to sales ratio, implying more earnings per square meter.

The company's international sales jumped to £206.2 million (€246.3m-$336.7m) for the six months. This was more than double the turnover achieved outside the U.K. during the same period last year, partly due to the acquisitions in Austria and the Baltics, which jointly added sales of £87.7 million (€104.8m-$143.2m). However, even without that, the group's international retail sales were up by 30.8 percent to £118.5 million (€141.6m-$193.6m) for the half-year, which was a rise of 22.6 percent in local currencies. This increase was driven by an increase of 18.7 percent in retail space, with the opening of four stores in Poland, two in Hungary and one in Spain, while another was closed in Belgium.

Online sales were up by 43.0 percent to £158 million (€188.8m-$258.1m). This amounts to a share of 15.5 percent of all sports retail sales, a rise of 3.0 percentage points compared with the same period the previous year. SDI's sports retail sales as a whole advanced by 13.2 percent to £1,048.4 million (€1,252.5m-$1,712.9m).

Sales expanded at the group's fashion stores by 83.2 percent to £102.8 million (€122.8m-$168.0m), but this was chiefly due to the acquisition of former Republic stores in February. Excluding Republic, sales in the fashion stores were up by 16.9 percent to £65.6 million (€78.4m-$107.2m), with growing turnover at USC and Flannels. SDI converted 43 Republic stores to the USC banner in the first half, while another 44 of them were closed and the acquired retailer's warehouse and head office were transferred to USC facilities. SDI also launched online stores at flannels.com and cruisefashion.co.uk.

Sales by the company's brands unit as a whole dropped by 0.7 percent to £106.2 million (€126.9m-$173.5m), but the decrease was entirely due to the group's wholesale operations, as SDI continues to focus on licensing instead. This decline in wholesale revenues was attributed to a decision to sell more of the Firetrap brand in SDI's own fashion and sports stores.

The wholesale turnover dropped by 1.6 percent to £90.8 million (€108.5m-$148.4m), while licensing income increased by 5.5 percent to £15.4 million, driven by the Everlast, Dunlop and Slazenger brands. This rise was fueled by the Americas, the Middle East and Asia-Pacific, while SDI is having a tougher time with licensing in the U.K. and the rest of Europe. Another 42 license agreements were sealed in the six months, with annual minimum guarantees of $38 million over their contracting period.

The entire group's gross profit margin for the six months went up by 1.9 percentage points to 43.1 percent. For the group's retail activities alone, this margin advanced by 2.2 percentage points to 43.2 percent. The British sports stores lifted their gross margin by 1.5 percentage points to 43.8 percent.

However, the business around Eybl and Sportland was way below the group's average for retailing, reaching a gross margin of just 37.3 percent. The gross margin for all international retail operations therefore decreased by 0.4 percentage points to 44.0 percent. Without the two above acquisitions, the international retail gross margin would have reached 45.1 percent, up by 0.7 percentage points.

The gross margin of SDI's fashion retail chains reached 43.6 percent excluding Republic and 43.0 percent including the acquired businesses, which was flat compared with the same period last year. As for the brands business, its gross margin shrank by 1.1 percentage points to 41.9 percent. The wholesale gross margin was down by 2.0 basis points to 32.0 percent, due to lower sales of the high-margin Firetrap brand in this segment. SDI expects this wholesale gross margin to decrease slightly again in the second half of the year.

Earnings before interest, tax, depreciation and amortization (Ebitda) advanced by 37.5 percent to £11.0 million (€13.1m-$18.0m) for the international sports stores excluding associates and acquisitions. The group reported negative Ebitda of £11.8 million (€14.1m-$19.3m) on the fashion retailing side, due to one-off restructuring costs of £6.3 million (€7.5m-$10.3m) and related trading losses of £6.4 million (€7.6m-$10.5m) at Republic. Without that, Ebitda in fashion retail would have increased to a profit of £0.8 million (€1.0m-$1.3m). Due to lower operating costs, underlying Ebitda of the brands unit inflated by 2.2 percent to £14.0 million (€16.7m-$22.9m).

SDI's underlying Ebitda climbed by 12.3 percent to £183.3 million (€219.0m-$300.0m) before the costs of the company's share bonus scheme costs. The reported profit before tax landed at £143.1 million (€171.0m-$233.9m) for the six months, an increase of 14.3 percent.

Some analysts were a little disappointed that SDI does'nt expect this first-half performance to continue in the second half. However, the group predicts that it will achieve at least its internal underlying Ebitda target of £310 million (€370.4m-$506.6m) for the full year, before the cost of the employee bonus share scheme.

Separately, SDI announced that its long-time group finance director, Bob Mellors, has asked to leave the company on health grounds, retiring at the end of this month.