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City viewpoint - Still much to prove at Sports Direct
Archived article dated Tuesday May 5th 2009
Consumers either love or hate shopping in Sports Direct stores and the company elicits equally divergent emotions from City analysts with one camp finding appeal in its 'pile it high, sell it cheap' approach while the other regards it as a jumble.
By Glynn Davis, City editor
The former camp enjoyed a boost recently with Sports Direct's pre-close update revealing that Q3 sales were well ahead of market expectations and that the outlook for the final quarter was equally positive. This came alongside the management's statement that it would meet its earlier guidance of ebitda of £135 million for the full-year.This performance suggests the group has achieved creditable high single digit like-for-like sales growth in Q4, which has contributed to the rise in its shares during 2009. They have moved from 44p at the start of the year to a current 67.5p, compared with their 12-month low of 32p in early December.
But at what price has this strong sales performance been achieved? The downside to its hard-selling approach, which has been aimed at putting its rivals under intense pressure, is that its margins have taken a hit. They have been affected by a combination of foreign exchange, markdowns, and the increasing shift in the retail mix to lower margin third-party brands.
To fuel its gung-ho sales strategy the group has bought stock aggressively, which is predicted to leave it with a large amount of product on its hands at the year-end. Investec Securities reckons this will affect margins into the 2010 financial year with Sports Direct only balancing its supply and demand levels with its autumn/winter 2009 range at the earliest.
This over-supply problem will be exacerbated by the current industry trend for the de-stocking of brands by retailers, which will affect the group's Brands (wholesale) division. This will require it to seek out new distribution channels for its various in-house branded ranges.
The other major factor to potentially affect Sports Direct in the near-term is the growing level of competition. Much has been made of the demise of JJB as a credible competitor that could open up more of the market to Sports Direct. But beyond this positive there is arguably a growing level of competition.
The return of JJB founder Dave Whelan to the sportswear market following his purchase of the JJB healthclubs business is one of a number of new threats. The sportswear market is also proving tempting to general retailers such as Debenhams and Next and online merchants Asos and M&M Direct who are moving into traditional Sports Direct territory. And then there is the very successful JD Sports.
The argument from Sports Direct fans is that the company's market-leading position should justify it having a premium rating to the rest of the sector, ahead of the likes of JD Sports.
But where the latter has proved itself with its consistent trading record, Sports Direct has been a model of inconsistency. And for investors to be fully convinced that it is now worth their consideration it needs to deliver more than a couple of quarters of increased sales.
glynnd@theretailbulletin.com
Tagged as: Sports Direct | JJB | JD Sports
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