At first glance it would be easy to write off Sports Direct’s preliminary results, which saw pre-tax profit plunge almost 60%, as an unmitigated disaster.
The retailer attributed the slump in earnings to currency fluctuations and subsequently squeezed margins, as well as failing to sufficiently hedge against the outcome of the EU referendum vote last June, both of which it flagged at its interim results back in November.
Yet, however dismal this profit figure may seem, it does not tell the full story.
Since the retailer’s results were released its share price has climbed and, at the time of writing, was up by 11%.
There are glimmers of good news in Sports Direct’s preliminary results.
The retailer’s underlying UK retail sales increased 2.6%, excluding acquisitions and figures from the 53rd week.
Like-for-likes in its home market edged up 0.3%, a steady if not spectacular performance against a backdrop of consumer uncertainty and flagging fortunes at many clothing retailers.
However, the main source of optimism amongst analysts was chief executive Mike Ashley’s audacious declaration that the retailer will deliver between 5% and 15% underlying EBITDA growth in 2018.
All the factors in this morning’s results that dragged the retailer’s EBITDA down 28.5% will continue to impact Sports Direct and the wider retail market in the year ahead – so why is Ashley so confident he can return the business he founded to profit growth?
Flashing the cash for new stores
The phrase ‘Selfridges of sport’ is peppered throughout Sports Direct’s preliminary results a total of six times, in case anyone was in any doubt about what Ashley’s long-term ambition for the retailer is.
One of the key ways that the retailer has begun to make good on this promise, which Ashley says it is “on course” to deliver, is by overhauling its bricks-and-mortar estate with a keen focus on fewer, better stores.
The sports retailer has ploughed £317m into freehold store acquisitions over the last year and says its new generation flagship stores are performing ahead of expectations.
The retailer revealed that the EBITDA of its worst-performing new flagship store is £1m, double the earnings of the average UK store, whilst the new flagship with the highest turnover raked in £2.1m EBITDA.
Sports Direct has been buoyed by this performance and plans to open between 12 and 18 ‘new generation’ UK stores in the year ahead to supercharge sales, half of which will be flagships.
However, Peel Hunt analyst Jonathan Pritchard warns that the retailer has a way to go yet before realising its ambition of being a premium sports retail emporium.
“Let’s not forget Sports Direct has only got about 20 flagship stores and more than 400 are non-flagship, so the vast majority of customers’ relationship with the business remain at the the ‘pile it high, sell it cheap’ end of the market,” he says.
Bucking up the brand
Sports Direct seems set on changing the perception of its business not just amongst the customers who shop there, but the brands who supply it.
The retailer unveiled a strategic partnership with Japanese sports brand Asics this morning to serve “the ever changing demands of the running consumer”.
As part of the tie-up, Asics will relaunch its offer next year within Sports Direct’s flagship stores.
Sports Direct is also aiming to push its specialist credentials in the sports market, positioning itself as ‘the home of football’ on the high street.
It has highlighted improving its relationships with third-party brands in the year ahead as a key priority, while it also aims to provide a more comprehensive in-store offer across speciality sports and fashion brands.
In the shorter term, Sports Direct says it has rejigged its marketing towards “brand and category-led campaigns”, as opposed to a “previous focus on offer-led campaigns.”
Focusing on cool credentials over value is a strategy that has paid dividends for Sports Direct’s fierce rival JD Sports – and Ashley will hope it can pay similar dividends.
Cleaning up at home
Sports Direct’s reputation has taken a battering in recent years amid damaging accusations about working conditions at its Shirebrook warehouse, the subsequent Parliamentary inquiry and the allegations made against Ashley in court earlier this month.
The perceived wisdom of low expectations being easily surpassed may have been true today following the news that the retailer has at last appointed a chief financial officer.
Jon Kempster, who joins the business from construction equipment supplier JVM Group, will take the helm of its finance division on September 11.
However, this is not the only move that Sports Direct has made in tidying up its internal operations.
The business also launched an initiative entitled ‘Your Company, Your Voice’ to allow its employees and agency workers in Shirebrook to provide feedback.
It appointed a workers representative to the board in April and has launched a staff wellbeing service.
Sports Direct chairman Keith Hellawell vowed at the retailer’s annual general meeting last year to step down from his role if he did not win the majority of votes.
Whilst a vote of confidence from Ashley in January secured Hellawell’s position, Hellawell says that he hopes “the progress we have made over the last 12 months will be taken into account by shareholders prior to the next shareholder vote at our AGM in 2017.”
It is clear that, after a litany of blunders, Sports Direct believes its growth strategy will soon have it hitting headlines for the right reasons.