Executives at Sports Direct International (SDI), the leading U.K. sports retailer and brand owner, stated that the company suffered its worst year ever, as its sales declined by 6.5 percent to £1.26 billion (€1.58b-$3.13b) for the full year ended on April 27. The company’s margin and underlying profits were further squeezed by the wettest summer on record, the dismal performance of the England football team and grim retail conditions in the second half of the fiscal year.
SDI shares slipped by as much as 15 percent – reaching a new low of 61.25 pence (€0.77-$1.21) a share, compared with 300 pence at the time of its introduction on the London Stock Exchange early last year – when the company published its figures on Thursday, giving no reassurance that the situation would improve this year. It predicted that underlying operating profit before depreciation and amortization (EBITDA) should remain roughly stable for the current year, after a drop of 29.9 percent to £150.2 million (€188.9m-$373.7m) for the past year.
Mike Ashley, who made £929 million (€1.17b-$1.84b) on the public offering but still controls about 70 percent of the company, told reporters that the management might have taken its eye off the ball last year, because of the stock market launch. The company had then been hit by a string of misfortunes but had taken measures to redress the situation. EBITDA was marginally higher in May and June, in spite of ongoing pressure on consumer spending in the U.K.
The sales decline for the year ended in April was chiefly caused by falling sales in Sports Direct’s U.K. retail division, which dropped by 10.5 percent to £957.7 million (€1.20b-$1.89b) The company declined to provide comparable sales figures, but it may be assumed that the drop was badly hurtful on a same-surface basis, since Sports Direct had 42 more stores in the U.K. at the end of the latest financial year.
The retailer opened 50 stores, of which eight were relocated. Excluding these relocations it closed 32 stores, mostly smaller non-core units. All of the new doors were opened under the sportsdirect.com banner. SDI wants to open another 20 stores this year and it will continue to adjust the layout of its stores, displaying the products by category.
The sales drop in British retail stores was partly compensated by a sales rise of 20.8 percent to £77.3 million (€97.2m-$152.9m) for the company’s retail sales in other countries, from Belgium to the Netherlands and Slovenia. In constant currencies, the sales increase would have amounted to 15 percent.
In Belgium, SDI has raised the number of its stores from 33 to 39 and the banner has been grabbing share from its rivals, as hard-pressed consumers turned to price-aggressive retailers. The company has another four stores in the Netherlands, one in Luxembourg and 14 in Slovenia, trading as Sport 2000 Slovenia. After the end of the fiscal year, SDI opened another two stores in Cyprus, with a local partner.
On the wholesale side, Sports Direct’s sales went up by 11 percent to £171.5 million (€215.6m-$339.3m), while licensing revenues rose by 21.3 percent to £21.1 million (€26.5m-$41.7m). In both cases, however, this could be chiefly attributed to the acquisition of Everlast, the U.S. boxing brand. It contributed £19.8 million (€24.9m-$39.2m) to brand revenues and £3.2 million (€4.0m-$6.3m) to profit after tax.
Another part of the growth came from agreements signed by SDI with two international partners. A licensing agreement with Retail Corp led to the opening of several stores in South Africa and Dubai. An agreement inked with ITAT, a Chinese retailer, has placed ranges of products under brands owned by SDI in more than 100 of its stores. SDI pockets only a percentage of the retail price on these sales. Revenues from these agreements are included in the brand and licensing revenues, as opposed to the retail section.
In spite of the rough retail environment in the U.K., the company managed to lift its gross margin to 45.7 percent for its domestic retail operations. It had to resort to discounts to keep stock levels down in the summer. The situation improved somewhat in the second half, but not as much as SDI had anticipated. The gross margin of all retail activities remained flat at 44.3 percent.
Meanwhile, the brand division’s margin dropped sharply. It fell by 4.0 percentage points to 40.2 percent as Sports Direct discounted prices to maintain sales volumes in the second half. Overall, the group’s gross margin was down by 0.7 percentage points to 43.6 percent.
Underlying profit before tax plummeted by 51.1 percent to £85.4 million (€107.4m-$169.0m). As the company itself pointed out, this reflects the situation more adequately than its reported profit before tax of £119 million (€149.6m-$235.4m), up by 96.5 percent. The jump is due to the fact that the previous year’s accounts included many exceptional items, such as IPO costs, management bonuses and foreign exchange losses. By contrast, the accounts for the year ended in April 2008 include investment income of £41.4 million (€52.0m-$81.9m), relating to the partial sale of SDI’s stake in Amer Sports.
The company ended the year with net debt of £465.2 million (€584.8m-$920.4m), up sharply compared with £38.1 million at the end of the previous fiscal year. However, debt has been significantly reduced since the end of the first half, when it stood at £795.9 million. Among other transactions, SDI acquired the outdoor retailer Field & Trek, in two chunks, and Everlast, at £80.9 million (€101.7m-$160.1m). Furthermore, it bought the 20 percent of Sport 2000 Slovenia that it didn’t already own, at a cost of about €1 million, and it acquired a remaining minority interest in Smith and Brooks, a children’s wear wholesaler, for £3 million (€3.8m-$5.9m). Then again, SDI sold the Original Shoe Company for £5 million to JJB Sports, its leading rival.
As if the flak over Sports Direct’s performance wasn’t enough, Ashley has been at the center of insistent press reports that he intends to sell Newcastle United, the club he purchased about two years ago for £134.4 million (€169.0m-$265.9m). His lieutenants have dismissed as absolute nonsense reports that he was asking for £420 million to sell the club, which has suffered from management squabbles and the under-performance of the squad. However, Intermedia Partners, a New-York based investment group, and a company owned by relatives of Osama bin Laden were both linked with bids.
Ashley has reportedly plowed about £100 million (€125.7m-$197.9m) into Newcastle United since his acquisition, to build up a stronger team and to redress the club’s debt situation. Rubbishing reports of a sale, he said that he would indeed welcome partners to invest in the club, but he would “start with people from Newcastle, not in some cave in Afghanistan.”
