Sports Direct invests more in flagship stores

Sports Direct International (SDI) suffered a steep fall in profits for the six months to Oct. 29, but the British sports retailer attempted to assuage investors with what it referred to as the “spectacular trading performance” of its flagship stores and an expanded partnership with Nike.

The group's sales were up by 4.7 percent to £1,714.6 million (€1,933.7m-$2,296.8m) for the six months, which represent the first half of its fiscal year. This includes a drop of 1.0 percent for its U.K. retail business to £1,142.3 million (€1,288.2m-$1,530.2m), including wholesale revenues. The group's international sales were up by 4.0 percent to £343.5 million (€387.4m-$460.1m) – but they dipped by 0.8 percent in local currencies. SDI's turnover was inflated by the addition of U.S. retail sales amounting to £63.9 million (€72.1m-$85.6m), following the acquisition of assets from Eastern Mountain Sports and Bob's stores. Without this acquisition and the disposal of rights to the Dunlop brand, and in constant currencies, sales were up by 1.2 percent.

The group's gross profit margin was down by 1.8 percentage points to 38.6 percent but the underlying Ebitda was up by 7.4 percent to £156.1 million (€176.0m-$209.1m), due to improved trading and reduced costs. Still, reported pre-tax earnings ended 67.3 percent lower at £45.8 million (€51.7m-$61.4m), partly due to the fact that the same period last year included a profit of £119.7 million (€135.0m-$160.3m) relating to the sale of shares in JD Sports Fashion. SDI continues to anticipate that growth in underlying Ebitda for the full fiscal year will be within its forecast range of 5 percent to 15 percent.

The slight decline in U.K. sales comes as SDI is striving to upgrade its positioning, investing in larger stores with cleaner and brand-oriented displays. Mike Ashley, the group's chief executive and majority shareholder, said that Sports Direct intends to open between ten and 12 new flagship stores next year. The locations scheduled to open include Leicester, Watford and Thurrock.

This makes it all the more compelling for the company to reinforce its partnership with leading brands, which it already did with Asics a few months ago. As reported by The Telepraph, Ashley reportedly told analysts at a briefing after the release of the results that SDI had secured a contract with Nike, under which Sports Direct will get the brand's latest products, including upmarket football boots with a recommended price tag of nearly £250 (€281.9-$334.9). While SDI's shares tumbled after the publication of the figures, they regained some ground after the briefing.

The group's U.K. sports retail business comprised 507 stores at the end of October, down by 12 compared with the same time last year. The entity this year includes USC, a sports fashion retailer that relates more directly with sports retailing than with SDI's premium lifestyle business. SDI reported a sales decline of 1.4 percent to £1,120.3 million (€1,263.4m-$1,500.7m) for its U.K. sports retail business, covering British sports retail stores along with the group's fitness division, the Heatons stores in Northern Ireland and online sales.

The U.K. sports retail segment saw its gross profit margin dip by 0.8 percentage points to 39.4 percent but a decline of 9.7 percent in operating costs enabled it to raise its underlying Ebitda by 5.4 percent to £145.5 million (€164.1m-$194.9m) for the six months. This includes a loss on associates relating to the trade losses and impairment of the group's investment in Brasher Leisure, among other items. Brasher Leisure is the company behind Sweatshop, a group of running specialist stores in which Sports Direct started investing three years ago. Several Sweatshop stores were reportedly closed over the summer and in the last months, to be relocated inside Sports Direct stores.

The group's international sports retail segment comprised 287 stores at the end of October, three fewer than at the end of the year-ago period. The decline was chiefly caused by closures in Austria, where SDI has just 30 stores left, down from 39. The number of Belgian stores also declined by three to 38 and another four were closed in Hungary, where SDI ended the six months with nine stores. France has apparently been another tough market for Sports Direct, since it closed down two stores to run just five. On the other hand, SDI expanded in the Republic of Ireland, where the number of stores increased by four to 33, excluding 14 standalone Heatons stores. Further afield in Malaysia, seven stores were added and SDI ended the period there with 30 outlets, which it owns at 51.0 percent.

The store closures led to a sales decline of 0.8 percent in constant currencies for the international retail business, but the gross profit margin firmed up by 1.1 percentage points to 40.8 percent. A reduction of 12.1 percent in operating costs was another factor that helped this entity to return an underlying operating profit of £15.6 million (€17.6m-$20.9m), compared with a loss of £10.7 million for the year-ago period.

The international segment excludes sales of £63.9 million for the 49 U.S. stores acquired in May. They generated a gross profit margin of just 11.1 percent. After operating costs of £30.1 million, they ended up with an underlying operating loss of £23.0 million (€25.9m-$30.8m).

SDI's premium lifestyle division saw its sales soar by 65.5 percent to £67.7 million (€76.3m-$90.7m), despite the fact that the number of stores was reduced by four to 30. The group attributed the sales jump to Flannels, which opened four more stores and whipped up its online sales. However, the division's gross profit margin shrank by 8.3 percentage points to 31.8 percent and it ended up with underlying operating profit of just £0.7 million (€0.8m-$0.9m).

The brands business suffered a sales drop of 13.9 percent to £97.2 million (€109.6m-$130.2m), with declines in both wholesale and licensing revenues. Due to a sharp reduction in operating costs, the division's underlying Ebitda was still up by 1.2 percent to £17.3 million (€19.5m-$23.2m).

Due to investments in the group's strategic development, its debt has inflated from £182.1 million at the end of the previous fiscal year to £471.7 million (€532.0m-$631.9m) just six months later. SDI has recently announced a new revolving credit facility valid for four years, allowing it to borrow up to £907.5 million (€1,023.4m-$1,215.7m), and it will likely seek to increase this facility to £1 billion through an accordion arrangement. In October the company announced that it appointed Liam Rowley, a former equity research analyst, to the function of head of strategic investments. His assignment is to manage strategic stakes, broaden or intensify commercial relationships and retail channels and potentially diversify the business.

The day before the release of the half-year results, the group held an extraordinary shareholders' assembly in which 70.73 percent of the independent shareholders rejected a payment of £11 million (€12.4m-$14.7m) to John Ashley, Mike's elder brother. As previously reported, the board had suggested that John Ashley was owed this sum for his work at SDI, but he hadn't received it due to publicity concerns. Mike Ashley abstained from the vote at the assembly, and the payment was turned down. At the same meeting, 65.87 percent of independent shareholders voted against another proposal to ensure a minimum payout of £3 per share for the two remaining participants in its executive bonus share scheme, Karen Byers and Sean Nevitt, if they decide to exercise their awards before September 2018, and £4 per share if the do so later.

In September, SDI paid bonuses of £43 million (€48.5m-$57.6m) to eligible employees when 11.1 million ordinary shares were acquired by nearly 2,000 participants in the company's share schemes.