Sports Direct’s performance disappoints some investors

Sports Direct International (SDI) was under pressure this week as its results for the first half of its fiscal year disappointed some investors. The company had to impair goodwill for its under performing Austrian stores, and it is facing yet more allegations over work practices at its huge warehouse.

The turnover of the British sports vendor and retailer crawled up by 0.1 percent to £1,433.7 million (€1,968.9m-$2,151.8m) for the six months until Oct. 25, which represented an increase of 2.0 percent in constant currencies. The sports retail division alone saw its sales rise by 0.2 percent to £1,233.5 million (€1,693.6m-$1,850.5m) but they were up by 2.5 percent in constant currencies. Dave Forsey, the group's chief executive, described the rise as an achievement given the fact that sales had been buoyed by the football World Cup in the same period last year.

Then again, some analysts estimate that SDI's comparable sales declined, given a flattish turnover and the addition of 23 stores across the U.K. and other European countries. Some have started to criticize the product ranges offered at SDI, arguing that they comprise too many private labels in the U.K., which haven't been properly adjusted to the demand in other European markets.

The store count in Britain (excluding Northern Ireland) reached 455 units at the end of the period, an increase of 15 stores. SDI opened 28 stores in the U.K. in the last six months, including nine relocations as the group continues to expand its average store surface, and it's still targeting 30 to 40 openings for the full financial year. SDI also opened five concessions in Debenhams department stores, raising their number to nine.

At the same time, SDI closed two stores in Austria and another in Belgium, but it opened 11 stores across five other European countries. Six were opened in Hungary and one in Poland. Furthermore, SDI continued to expand in the Baltic States, where it acquired the owner of the Sportland banner two years ago. It opened two stores in Lithuania and one in Latvia and in Estonia trading as Sportsdirect.com, while continuing to upgrade the Sportland stores.

However, the group took a goodwill impairment charge of £32.5 million (€44.6m-$48.8m) for its Austrian retail business, due to recent trading below expectations. SDI said it was taking longer than predicted to convert the former Eybl megastores, and the lost revenue in certain categories is proving harder to replace.

SDI products are retailed in 44 locations in the Republic of Ireland and 15 in Northern Ireland through its 50 percent shareholding in Heatons – five of them standalone stores and 37 operating as a sports section in a larger store. The British group recently announced that it was taking over the other half of the Irish company's shareholding. SDI says it has since obtained clearance for the deal from anti-trust authorities and expects to complete the acquisition by the end of April. SDI is planning substantial investments in Heatons in the coming years to improve the current sports offering.

Online sales enjoyed unspecified growth, following enhancements implemented last year, such as the click-and-collect function, a guest checkout and improvements in language and currency options for the European sites. Since the start of the current fiscal year, SDI has improved product searches and its platform for tablets and other mobile devices.

The group's warehouse in Shirebrook, which handles online orders, has been further enlarged as SDI completed the construction of an extra 700,000 square feet of office and warehousing facilities at its campus. While increasing online capacity, the extension should also serve for staff training and extra office space for brand partners.

SDI has also continued to invest in its fitness business, with the opening of one more gym in a retail store in the first half and another scheduled to open shortl y. The company said the growth of memberships in the newest gyms was above expectations.

The gross margin of SDI's sports retail business was up by 1.1 percentage points to 45.6 percent, due to a higher proportion of sales at the more upmarket end of its product offering. The group added that the division's gross profit was up by 5.2 percent in local currencies. Its operating costs were up by 1.0 percent because of the rationalization of the group's international business. Underlying earnings before amortization (Ebitda) for the sports retailing operations went up by 5.5 percent to £206.5 million (€283.6m-$309.9m).

Meanwhile, SDI's lifestyle retail division saw its sales plummet by 12.2 percent to £87.7 million (€120.4m-$131.6m) in the six months, chiefly due to the closure of an unspecified number of loss-making USC stores. The gross margin for the lifestyle stores was up by 2.9 percentage points to 41.3 percent, due to reduced stock clearance. The segment suffered an operating loss of £5.1 million (€7.0m-$7.7m), which was an improvement compared with a loss of £7.8 million for the same period last year.

The turnover of the group's own brands advanced by 10.2 percent to £112.5 million (€154.5m-$168.8m). That includes an increase of 11.2 percent to £96.5 million (€132.5m-$144.8m) in wholesale revenues, driven by expansion in the European and U.S. markets, and a rise of 4.6 percent to £16.0 million (€22.0m-$24.0m) in licensing revenues. SDI signed 23 new licensing agreements over the period with minimum guaranteed royalties of $9.8 million (€13.5m-$14.7m) for the entire duration of the contracts. Thanks to more efficient operations in Europe and stable marketing investments, operating costs for the brands decreased by 2.8 percent. This allowed the division to raise its underlying Ebitda by 13.2 percent to £17.1 million (€23.5m-$25.7m).

The entire group's gross margin was up by 0.9 percentage points to 44.9 percent, and this was attributed to a broadening product range and investments in the brands. SDI's underlying Ebitda advanced by 7.6 percent to £218.5 million (€300.2m-$327.9m). Underlying pre-tax profits landed at £166.4 million (€228.7m-$249.7m), an increase of 3.6 percent, but that was below an average forecast of about £180 million.

SDI ended the period with net profit of nearly £147.5 million (€202.7m-$221.4m), up by 27.9 percent. However, the figure was inflated by the disposal of about 5 million shares in JD Sports Fashion, which made up the bulk of a gain on disposals worth £53.6 million (€73.7m-$80.4m) for SDI over the six months. At the end of the period, SDI still held about 9.1 percent of JD's issued share capital.

SDI said that trading since the end of the period has been in line with management expectations, underpinning a revised target of £420 million (€577.2m-$630.4m) for underlying Ebitda for the full fiscal year.