Sports Direct International (SDI) strengthened its leadership of the British sports retail market, with an increase in its U.K. retail sales of 11 percent to £1,118 million (€1,337m-$1,731m) for the year ended April 25. In spite of the U.K.’s economic slump, SDI saw its comparable retail sales grow by 3.4 percent in the country, excluding Northern Ireland.
The retailer’s U.K. sales for the second half of its financial year were up by 7.2 percent to £531.7 million (€635.6m-$823.1m), which was better than expected ahead of the football World Cup. The gross margin on this part of SDI’s business reached 40.9 percent for these six months, up by 1.3 percentage points, in spite of comprehensive clearance ahead of the World Cup. For the full year, SDI’s gross margin for U.K. retailing dipped by 1.2 percentage points to 41.3 percent. However, due to the company’s sales increase, the underlying Ebitda of its U.K. retail operations jumped by nearly 30 percent to £138.7 million (€165.8m-$214.7m).
Sales related to the World Cup started in March but they culminated after the end of the reporting period, with Sports Direct enjoying record sales on the day of England’s game against the U.S. team. On the other hand, the retailer’s buyers had firmly expected the England team to at least reach the quarter-finals. The team’s failure to do so, and its uninspiring performance along the way, left Sports Direct with substantial excess stock. SDI warned that the cost of clearing this stock would offset the positive impact it enjoyed before the tournament – as evidenced by plentiful racks of England shirts retailing at £15 (€18-$23.20).
Still, SDI added that current retail trading in the U.K. remained well ahead of the same period last year. The Sport Direct chain’s turnover was boosted by a TV advertising campaign launched between March and June – a first for the retailer, which is preparing to do it again in the second half of the year.
Interestingly, these investments strongly stimulated SDI’s internet sales, which made up about 4.5 percent of its U.K. sales for the full year, compared with just 1.5 percent in the previous fiscal year. Furthermore, the retailer’s online sales were boosted by increased recognition of the Sports Direct banner, since about 90 percent of its core stores in the U.K. have been rebranded so far as sportsdirect.com. Excluding Northern Ireland, SDI’s current store network in the U.K. comprises 306 stores under the Sportsdirect.com banner, 19 stand-alone Field & Trek stores, three Lillywhites and 59 other stores, issued from chains that were taken over in the last years and kept their own name, such as Hargreaves and Gilesports.
SDI also provided details on its strategy to split its offering into distinct categories, sometimes leaning on the name and expertise of specialist retailers. For example, SDI confirmed that in October 2007 it acquired a stake of 25 percent in Brasher Leisure, the company behind the Sweatshop stores. This retailer has developed a secondary banner called She Runs He Runs, which SDI is using for special running corners within its stores. The roll-out went ahead swiftly in the last months, so that about half of SDI’s core stores in the U.K. have been fitted with She Runs He Runs sections.
As reported earlier this year, Sports Direct is applying the same strategy for golf after the acquisition of a minority stake in European Golf, a specialist retailer based in Derby. Another specialist section in some Sports Direct stores focuses on outdoor products, under the Field & Trek banner. The retailer has also launched Cycle Direct for bicycles, and it has outfitted about 75 percent of its stores with a so-called boot room to display football products.
The model for refitted Sports Direct stores is displayed at its huge campus store in Shirebrook. The store’s layout was entirely rebuilt, requiring an extension of SDI’s training facility. The full roll-out is expected to cost about £35.0 million (€41.8m-$54.2m), which was included in the group’s expected capital expenditure for the current financial year.
The U.K. continues to make up about 90.5 percent of SDI’s retail sales, but its international retail sales jumped by 17.2 percent to £119.9 million (€143.3m-$185.6m) for the full year, equivalent to an increase of 11.0 percent in euros. SDI opened one store in Belgium to reach a network of 44 stores in the country at the end of the fiscal year. It closed one in Slovenia, retaining a total of 12 units there.
SDI’s international retail business further encompasses four stores in the Netherlands, three in Cyprus, one in Luxembourg and one in France, which was opened in Fresnes near Paris in March, after a trial of three months. Also, the group increased its shareholding in the Heatons chain in Ireland from 42.5 percent to 50 percent. There are 11 Sports Direct stores in Northern Ireland and another 23 stores in the Republic of Ireland.
Owing to improved stock controls, SDI’s international retail business saw its gross margin increase by 0.4 percentage points. Its operating costs went up, but less so than the gross profit. The international retail segment ended the year with an increase of 5.8 percent in its underlying Ebitda to £12.7 million (€15.2m-$19.7m).
The SDI group’s total retail revenues, adding up its stores inside and outside the U.K. as well as a wholesale unit included in retailing, reached £1,261.1 million (€1,507m-$1,952m) for the year, up by 10.9 percent. The entire retail division’s gross margin dropped by 0.5 percentage points to 40.8 percent. Its underlying Ebitda jumped by 27.2 percent to £151.4 million (€181.0m-$234.4m).
Instead, SDI’s brands division saw its turnover shrink by 17.4 percent to £190.5 million (€227.7m-$294.9m), as SDI went ahead with its strategy to alter the sales mix from predominantly wholesaling to licensing – as it has done with the Dunlop brand in the North American market. Within this brands division, wholesale revenues were off by 17.8 percent to £167.3 million (€200.0m-$259.0m), partly due to the fact that SDI placed stronger emphasis on profits, by getting rid of unprofitable sales. Licensing revenues declined for the financial year as well, down by 13.8 percent to £23.2 million (€27.7m-$35.9m), chiefly due to the fact that SDI canceled a significant Everlast license. The market conditions in North America also depressed the turnover of some other licensees.
However, SDI has been strongly building on its licensing business in the last months: It signed agreements with 71 licensees, with minimum contracted values of $87 million over the terms of the deals. The company expects these licenses to lift the profitability of its brands unit, with most of the growth to come from Asia-Pacific and the Americas.
The wholesale unit’s gross margin for the year inched up by 0.2 percentage points to 30.4 percent, and the gross margin of the entire brands division increased by 0.6 percentage points to 38.9 percent. Operating costs went down, due to lower sales as well as the continued integration of the brands division into the Shirebrook campus. Its underlying Ebitda therefore climbed by 11.2 percent to £19.8 million (€23.7m-$30.7m). The company’s target for this fiscal year is that the wholesale unit should cover operating costs for the entire brands division, so that licensing income could be retained as profit.
Sales of the entire SDI group added up to £1,452 million (€1,736m-$2,248m), an increase of 6.2 percent. Its gross margin slid by 0.2 percentage points to 40.6 percent, but its underlying Ebitda jumped by 17.3 percent to £160.4 million (€191.8m-$248.3m). This was above the target set for the implementation of a bonus scheme that will see permanent employees get an extra 25 percent of their base pay in shares of £1, which will vest in two years’ time. The group ended the year with a net profit of £89.2 million (€106.6m-$138.1m), compared with a loss of £15.5 million the previous year.
Separately, SDI reduced its net debt by 27.7 percent to £311.9 million (€372.9m-$482.9m), which was better than a previously set April 2010 target of £400 million. This was achieved through the company’s growing earnings; reduced inventory levels; halving capital expenditures; reducing financing costs; and doing without a dividend this year. Net debt reached 1.9 times underlying Ebitda and SDI has set itself a new target of 1.0 to 1.5 times Ebitda by April 2011.
