The Croatian thunderbolt that deprived England’s football team last week of its qualification for next year’s European football championships has precipitated two profit warnings and deepened worries about the prospects of the British sports retail business over the next months.
Sports Direct International, the country’s largest sports retailer, was quick in warning that shareholders could no longer expect limited growth in its operating earnings before amortization and exceptional items for the full year ending April 27, 2008, as it had forecast at its somewhat farcical general shareholders meeting on Sept. 10. Since England has not qualified for the Euro 2008, Sports Direct stated, this indicator now appeared “likely to be below” the level of the previous financial year.
However, some analysts insinuated that England’s defeat was used as a mere excuse by Sports Direct to issue a belated profit warning, disguising a more structural downturn – and they grumbled that, yet again, the dates were the only figures on the statement. This was the company’s third profit warning since it went public last February. The retailer’s shares lost another 15 percent on the day, crashing through the £1 barrier to land at 96 pence, compared with an introduction price of 300 pence when Sports Direct was launched on the London Stock Exchange.
The drop has fueled speculation that Mike Ashley may be preparing to buy back the shares he sold in February and take Sports Direct private. At the time he earned about £929 million (€1.29bn-$1.9bn) by floating 34 percent of the company and retaining 57 percent. But as the shares slumped over the last months he already bought back thousands of them to accumulate a stake of 68 percent in Sports Direct. At the current price he could buy it back entirely for just £186 million (€258m-$382m) – albeit with far more debt than in February.
England’s uninspiring game since the start of the qualifications and its loss against Croatia last week were also a heavy blow for Umbro, maker of England shirts. The company already stated in September that the sell-through of England jerseys had been disappointing in the first half of the year. After England’s loss last week Umbro added that consumer demand for licensed apparel had weakened further since the summer. Combined with England’s failure to qualify for the Euro 2008, this will inevitably affect Umbro’s revenues in the present financial year, but Umbro warned that the effect on next year’s revenues should be much more pronounced, due to the missed sales of England’s “away” jersey.
The NPD Group estimates that England’s defeat could cost retailers up to £100 million (€139m-$205m) in football shirt sales. The figure is based on the fact that the 2006 World Cup inflated replica sales by an estimated £92 million (€128m-$190m) in the UK compared with 2005, when there wasn’t any international football competition. During the year of the last European Championships, in 2004, replica sales in the UK grew by about £77 million (€107m-$158m) compared with the previous year.
Sports Direct stands to suffer most since it has an agreement with Umbro to buy 65 percent of all football shirts produced for the UK market. But Steve Makin, Umbro’s chief executive, told The Times that the company would share the retailers’ pain by sharply reducing its production of away England jerseys next year. The figure has been divided by three to about one million shirts, which is the lowest production run since 2001.
Umbro regards England’s loss as a vindication of its strategy to concentrate on branded sales and the expansion of its international business. Umbro expects to generate 80 per cent of its turnover from international markets by 2010, up from 60 percent. For example, Makin said that Umbro wanted to more than double the number of stores it has in China to 3,000 over the next three years so that, by 2011, China could surpass Britain as the company’s largest market. New deals in Italy and Brazil were in the making as well.
Furthermore, Umbro is preparing an advertising campaign worth about £4 million (€5.5m-$8.2m) with the tagline “Bring It On.” To be launched at the beginning of January 2008, it will be supported by John Terry and Michael Owen, two leading England players. Most of the marketing spend will go to digital media rather than television and newspapers.
Still, some analysts estimated that England’s loss last week could shear about £10 million (€13.8m-$20.5m) off Umbro’s profits next year. It could hardly have come at a worse time for the shareholders of Umbro who might have been hoping for an increase in Nike’s bidding price for the company.
As things stand, Nike is going ahead with its offer of £285 million (€396m-$586m) under a "scheme of arrangement" that requires it to have at least 75 percent of the shares, in spite of Mike Ashley’s acquisition of a stake of nearly 30 percent in Umbro. Late last week Umbro sent out scheme documents in which the offer is outlined, based on an offer of 193.06 pence per Umbro share, and the payment of a dividend of 1.94 pence per share, amounting to a price of 195 pence per share.
The schedule calls for a court meeting and a general meeting to be held on Jan. 31, 2008, to gain the approval of shareholders representing at least 75 percent of the shares. The scheme could then be formally completed during a court hearing to be held at the end of February and it could become effective at the beginning of March. However, Nike still reserves the right to transform the proposed scheme into a straightforward offer that would only have to be approved by shareholders representing a straight majority of shares – and therefore wouldn’t have to be backed by Ashley.
England’s nightmare scenario has also dragged down the stock market value of JJB Sports, the country’s second-largest sports retailer. The defeat comes at a time when English consumers are beginning to cut down on spending, due to rising interest rates and worries about the global economic situation.
There might be more trouble looming for both Sports Direct and JJB as it was confirmed that the government’s Takeover Panel was investigating whether the two companies were acting in concert to block Nike’s intended takeover of Umbro.
The two retailers together hold a stake of about 39 percent in Umbro, well above the 30 percent that makes it compulsory for shareholders to launch a full bid. Although JJB and Sports Direct are head-on rivals in sports retailing, JJB’s chief executive, Chris Ronnie, is a personal friend and former employee of Ashley.
