Nick Bubb’s verdict: Sports Direct - challenging targets?

Mike Ashley is keen to encourage Sports Direct staff to work even harder to hit the company’s EBITDA target, but is this year’s target that challenging?

We can be sure that Mike Ashley prefers football to cricket, because retail analysts wanting to see the great man today had to give up any plans to go along to sunny Lords (for the first day of the Second Test against India) and wend their way instead to the HQ in Shirebrook in the Midlands for the results meeting.

It would have been interesting to go to Shirebrook to ask Mike about his decision to pull out of the Sports Direct share option scheme and hear him talk of his plans for global conquest but, funnily enough, I had other plans today…

To be fair, there was some method in the apparent scheduling madness because Sports Direct has just finished expanding the Shirebrook Sports Direct store, including the addition of a 9,000 sq ft dedicated Nike area and the opening of a USC store alongside.

And Sports Direct is about to start work on Phase 3 of the Shirebrook distribution centre expansion, via the construction of an additional 600,000 sq ft warehouse and office extension, which the company says “will be pivotal in facilitating our ambitious plans for growth”.

So, there is actually a bit for analysts to see in Shirebrook, as well as plenty of job creation opportunities for the local labour-force in the future.

But the main focus of discussion at the results meeting was doubtless about the apparently modest EBITDA target for this year and why the company is still not paying a dividend.

The great Warren Buffett once famously mocked management teams that did not challenge themselves: “Just shoot the arrow of business performance into a blank canvas and then carefully draw the bull’s-eye around the implanted arrow”.

Mike Ashley has not yet said why he pulled out of the controversial 2015 Sports Direct share option scheme, but no doubt he calculated that if all the Sports Direct staff got the shares instead then they will work even harder to hit the targets, which require underlying EBITDA to hit £750m in 2018/19, the year of the Next World Cup in Russia.

The statement by Sports Direct today says that “overall trading since the year end has been in line with management’s expectations, with some stronger weeks offset by England’s disappointing World Cup matches”.

That begs a few questions and it may be a surprise that the apparently conservative £360m underlying EBITDA target for this year has not been raised after the 15% growth to £331m in the year ending April.

In five years’ time Sports Direct is going to be an even bigger group, with plans afoot to build a business in Australia, as well to expand further into Europe, but it is already a complicated business with lots of moving parts.

The group’s brands division, which is involved in the wholesaling and licensing of brands such as Dunlop, Slazenger, Everlast, Lonsdale, Karrimor, Donnay and LA Gear, made underlying EBITDA of £30m last year (up 12%) and it should have a good year this year as it exploits back-office economies of scale.  

The core Sports Retail Division is, however, where the group makes most of its money and EBITDA here increased by a healthy 24% to £321m last year, in line with the 24% sales growth to £2.27bn, boosted slightly by the European acquisitions but basically reflecting strong ”multi-channel” trading in the UK.

However, Sports Direct also has its new premium lifestyle division comprising the fashion chains USC, Republic, Van Mildert, Cruise and Flannels.

Having made a modest £1m EBITDA contribution in 2012/13, this business contrived to lose £20m last year on sales of £214m due to the restructuring of the ill-fated Republic business, but this should bounce back strongly this year.

So the swing in the premium lifestyle division should get Sports Direct well on the way to making their £360m EBITDA target this year, if other things are equal.

Of course, other things might not have been equal this year, if the group’s key supplier Adidas had restricted its flow of product to the business, but recent tensions in the relationship with Adidas appear to have eased, which is a relief.

Adidas appears to think that not every Sports Direct store is smart enough to do its products justice, but it will have been impressed with how the smart new Oxford Street flagship store looks and with the plans for more store revamps, including Glasgow.

Targets are there to be beaten and with a stronger relationship with Adidas (and a recovery from the problems at Republic) the £360m EBITDA target this year should be beaten, despite England’s dismal performance in the World Cup in Brazil.

• Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos Retail Think-Tank.