There’s no doubt that the London financial market has fallen out of love with Mike Ashley and his Sports Direct International. When it published its first set of financial results on July 24, the share price tumbled, at one point touching £1.405 (€2.1m-$2.9m), down more than 25 percent on the day. The slide took the company to a value just a whisker above £1 billion (€1,481.5m-$2,040m) and very close to the £929 million (€1,376.3m-$1,895.2m) that Ashley took out when he sold 43 percent of the company to the market in its initial public offering in March. It then became a public company at a price of £3.00 (€4.44m-$6.12m) a share, valuing the business at more than £2 billion (€2,963m-$4,080m) .
The distressed share price is a symptom of both the uncertainties over the strategy and business outlook as well as the lack of communication coming from the reclusive entrepreneur. The results released for the 52 weeks ended April 29 showed earnings before interest, tax, depreciation and amortization (EBITDA) up by 31.8 percent to £191 million (€283m-$390m), marginally above the analysts’ latest expectations, and revenues up 12.8 percent to £1.35 billion (€2,000m-$2,754m). But pre-tax profits was down by 37.2 percent to £60.5 million (€89.6m-$123.4m) after bonuses of £56.4 million (€83.6m-$115.1m) were paid to key executives for past performance, a somewhat larger figure than the one foreshadowed in the IPO prospectus. Net income fell to £37.12 million (€55.0m-$75.7m) from $64.87 million in the previous year, when no such bonuses had been paid.
Other exceptional charges that depressed net and pre-tax income included a £6 million (€8.9m-$12.2m) provision for legal costs and a further £600,000 (€0.8m-$1.2m) for costs associated with its admission to trading as a public company. Exceptional items also included a £4.16 million (€6.2m-$8.5m) gain on the May 2006 sale to JD Sports of leases for airport stores previously held by Hargreaves, a sporting goods retail chain that Sports Direct had acquired a few months before, paying just £900,000 (€1.3m-$1.8m) for all its 45 stores. Finance costs rose to £41.2 million (€61.0m-$84.0m), from £17.8 million in the 53 weeks of the previous fiscal year, due mainly to a write-down of the value of its forward foreign exchange contracts.
Sports Direct urged investors to concentrate on the underlying performance, but with a warning that current business trends point to trouble ahead. It said the first three months of the current financial year have been “exceptionally difficult” as unprecedented weather conditions had an impact on sales. Due to the underlying strength of the business and its model, the company believes it should nonetheless be able to achieve “limited growth in EBITDA pre-exceptionals” in the current financial year. Unlike other retailers in the sector, Sports Direct gave no sales or margin figures for recent trading.
Analysts are concerned about the extent of the “limited growth” in EBITDA and the company’s unwillingness to supply the level of detail into operational matters that is customary in the disclosures of publicly listed retailers. At an apparently tempestuous analysts’ briefing which was closed to the press, Ashley refused to give same-store sales data. He reportedly argued that such same-store data would have been misleading because of the 2006 figures were inflated by the World Cup of football.
Analysts quoted by the Financial Times called the meeting “a shambles” and “farcical.” The FT also quoted Mal Patel, an analyst with Merrill Lynch, as saying that “things to date have been much worse than our worst fears.” Merrilll Lynch led the public offering and still acts as Sports Direct’s house broker. The Sunday Times quoted Ashley as referring to certain analysts as “a bunch of cry babies” who are only looking at short-term results.
At the analysts’ meeting, Ashley, whose title is vice chairman, reportedly dismissed speculation that he might take the company private again, which he could do at the post-news price and still have about £500 million (€740.7m-$1,020.0m) in funds available for investment. The company made no mention of rumors that it might try to merge with Foot Locker, but the FT quoted Ashley saying in an interview that he is not in a position to take on a deal of that size at this time.
Operating results for the full year were in line with the documents supplied at the time of the floatation. Gross margins were up by 600 basis points to 44.3 percent across the business. About one-half of the increase came from price increases achieved during the second half of the fiscal year, but the weakness of the dollar contributed about 20 percent of the improvement and another 30 percent came through cost savings in distribution and better security to prevent stock losses.
Retail revenues rose by 16.2 percent to £1.18 billion (€1,748.1m-$2,407.2m), and with the cost of sales up by only 3.7 percent, the division’s gross profit reached £520.3 million (€770.8m-$1,061.4m), up 37.1 percent. Following various acquisitions in the past year and a half, including Gilesport, Hargreaves and Original Shoe Company, the group now operates from 462 stores, 414 of which are in Britain, 33 in Belgium, 11 in Slovenia and four in the Netherlands. Through its 42.5 percent shareholding in Heatons, it operates at 13 locations in Northern Ireland and the Irish Republic. The division’s results included £14.7 million (€21.8m-$30.0m) from the sale of property.
The brands division saw full-year revenues slip by 6.3 percent to £171.9 million (€254.7m-$350.7m). But its gross profits were only 1.7 percent lower at £75.9 million (€112.4m-$154.9m). The drop in revenues was attributed to a loss of golf ball sales following the closure of a factory in the USA. But licensing income was up 22.5 percent. The brands division has now completed a deal with a Dubai-based company to develop between 15 and 25 Sports World and Lillywhites stores in the Middle East and South Africa, 18 of which should be open by 2010 when South Africa hosts the FIFA World Cup.
The company completed margin-enhancing changes in retail logistics in April, consolidating all distribution operations in the UK with the head office of its retail division. The brands division will relocate to the same site during the current year. Plans for the future involve adding about 40 new stores under the Sports Direct banner during the current fiscal year. Reportedly, the group is also planning to open three health and fitness clubs alongside sporting goods stores, a toe in the water of the strategy developed successfully by its closest rival in UK retailing, JJB Sports.
Sports Direct is looking to add more brands to its portfolio, which currently includes Lonsdale, Slazenger, Dunlop, Kangol and Karrimor. It signed an agreement to merge with Everlast, the U.S. boxing brand listed on NASDAQ, and it raised the possibility of further diversification away from sporting goods. The company plans to seek shareholders’ approval to acquire 35 properties that Ashley holds personally and from which the company operates. These purchases, worth about £100 million (€148.1m-$204.0m), are intended to reduce the potential conflicts between his personal interests and his obligations as a director.
The company also plans to use spare cash to buy back some of its own shares. Shortly after the announcement, it spent £12.4 million (€18.4m-$25.3m) to acquire 8.42 million shares in the first three days after the latest results were announced, representing 1.2 percent of its own equity.