Good news and bad at Flannels and Bob's owner Sports Direct

Sports Direct has certainly had its ups and downs in recent years so in a period when much of UK retail, and especially fashion retail, is suffering, how has it fared?


Sports Direct/Nike


Its first-half results on Thursday showed that “ups and downs” is probably an apt term. Its sales are rising and especially its sales in the Premium Lifestyle segment. But its debt is rising too and while underlying pre-tax profit is up, reported profit is down sharply. So what exactly is going on?

This is a company in transition so to get a clear picture, let’s get the figures out of the way first. In the 26 weeks to October 29, group revenue rose 4.7% to £1.714 billion (or 1.2% currency-neutral). UK Sports Retail revenue dipped 1% to £1.142 billion “due to reduced online promotional activity and store closures as part of the continued elevation of the portfolio.” International Sports Retail fell 0.8% on a currency-neutral basis

US Retail (with no comparison period as it was only acquired in May) was £63.9 million and Premium Lifestyle revenue surged 65.5% to £67.7 million. Revenue from its Brands division was down 13.9% to £97.2 million and the group gross margin fell 180bps to 38.6%.

And profits? Underlying profit on an Ebitda basis rose 7.4% to £156.1 million, and underlying pre-tax profit surged 22.9% to £88 million, but reported pre-tax profit was down 67.3% to £45.8 million. Net debt was up a hefty 159% to over £471 million, “due to continued long-term investment in strategic relationships, the high street elevation strategy and the share buyback programme.”

Interestingly, the company also said that “due to increasing customer expectations for new product, inventory provisions have increased to £133.9m [from £122.7 million].”

HAPPY ASHLEY

Controlling shareholder and CEO Mike Ashley was resolutely upbeat about all this, saying: "Our high street elevation strategy is currently delivering spectacular trading performance within our flagship stores” and “we intend to open between 10 and 20 new flagship stores next year.”

He added that while the reported profit before tax “has been impacted by fair value adjustments and transitional factors such as the disposal of assets in FY17, our underlying profit before tax remains healthy. We will continue to invest for the long-term.”

So he certainly feels the business is on the right track and the review that came with the results reiterated that "FY18 H1 has seen the company continue to make good progress in elevating our retail proposition on the high street and elsewhere in order to deliver an enhanced offering to customers”. It also said that it “remains on course to deliver an increase in underlying earnings in line with our forecast in July.”

So ignoring the profits falls and focusing on the sales rises, what exactly was behind that? Well, the group revenue rise was “aided by favourable euro exchange rates and the acquisition of Bob's Stores and Eastern Mountain Sports during the period.” But that new business was also offset by store closures (“as part of the continued elevation of the portfolio.”) 

UK Sports Retail’s small sales fall was mainly due to reduced online promotional activity and store closures and also came with a gross margin down 80bps to 39.4% due to additional stock provisions and the continued adverse US dollar rate.

The International Sports Retail division, which includes sports retail store management and operations outside of the UK, including the European distribution centres in Belgium and Austria accounts for over 20% of group revenue.
Sales growth of 4% was largely due to the translation of sales at an improved EUR/GBP exchange rate. On a currency-neutral basis, the rise was much lower due to store closures, although higher margins meant that at least this business is improving.


Flannels


And the US? The group’s May purchase of Bob's Stores and Eastern Mountain Sports there consists of 49 retail stores and will provide Sports Direct with a “footprint in US bricks-and-mortar retail and a platform from which to grow US online sales,” it said so expect to hear a lot more about that in future results announcements.

HIGHER-END ADVANCE

Meanwhile, the Premium Lifestyle division that includes Flannels.com, Cruise and Van Mildert, saw a sales surge largely due to increased sales through the Flannels.com website and to new stores. But the gross margin decreased to 31.8% due to an increase in stock provisions “and customer demand for the latest products.” Operating costs increased by 34.2% to £20.8m due to new Flannels stores and Premium Lifestyle underlying Ebitda fell from £0.9m to £0.7m.

Finally, the Brands unit operates its global heritage group brands, and its wholesale and licensing relationships across the world, as well as its partnerships with third party brands that the firm licenses-in to sell in Sports Retail and Premium Lifestyle divisions. Revenue here fell mainly due to the disposal of the Dunlop wholesale activity in March.

So, as mentioned, this is definitely a company in transition. Despite Mike Ashley’s upbeat assessment, it’s perhaps too early to assess just how successful that eventual transition will be, but for now, it’s an undeniably interesting story to follow.

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