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City viewpoint: Blacks Leisure still surfing crest of a downwave

The decision by Sports Direct boss Mike Ashley to purchase Newcastle United has been as poor a move as his threat in June 2007 to oust the board of Blacks Leisure if they continued with their plan to potentially offload the company’s Boardwear division. By Glynn Davis, City editor


City viewpoint: Blacks Leisure still surfing crest of a downwave

Whether or not Ashley and his influential 30 per cent stake in Blacks contributed to the company's decision to retain its Freespirit and O'Neill boardwear chains, it has ultimately proven to be a costly mistake for the group and its investors.

Blacks Leisure's recent preliminary results showed the company going further into the red as both its Boardwear chains and O'Neill wholesale business continued to

drag the group's overall performance down the pan.

For the year ended 28 February the group reported an operating loss before tax and exceptional items of £4.4 million - comprising a profit of £6.2 million from its Outdoor formats (Millets and Blacks) and a wipe-out loss of £7.8 million at its Boardwear division.

Not surprisingly the company has been seeking to reduce its presence in this troubled part of its business. With or without the Ashley intervention this problem should have been addressed earlier, because if it had been the company would not now find itself in such a ropey financial predicament - whereby it is relying on the extension to a banking facility from Lloyds Bank for its survival.

Such has been the damage wrought by holding onto the Boardwear division for too long that the company included a worrying 'going concern' note within its results that stated: “material uncertainty of the bank facility not being extended beyond August 31 may cast doubt on the group's ability to continue as a going concern”.

Progress made so far in ditching Boardwear has included an exit from the O'Neill wholesaling contract, the rebranding of eight stores (representing a quarter of the Boardwear estate) to an Outdoor format. Discussions with Lloyds centre on how Blacks can accelerate its departure from this division.

Further evidence of the divergent performance of the group's two divisions can be seen in the trading figures for the 12 weeks to 23 May with the Outdoor chains reporting a 1.2 per cent like-for-like increase whereas Boardwear declined by 10.2 per cent.

To address its loss-making status the company has also been focused on reducing its cost base with a cut of £6.6 million delivered during the past year (against a forecast of £3 million). This suggests there must have been plenty to go at.

In addition, its turnaround plan has also included the development of two new outdoor formats for Blacks and Millets and the group hopes these will be used as the templates to refresh the rest of its stores.

Whether this is possible depends on the results of the company's banking negotiations, which is the key uncertainty surrounding the business. Although the company's board has stated that the bank is supportive of its turnaround strategy this clearly provides no guarantees for investors.

Needless to say this level of uncertainty, combined with the continued dire trading within Boardwear, has resulted in a decline in the Blacks share price from 169.75p a year ago to a current 41.25p - although this is an improvement on the 12-month low of 14p in late December.

For those willing to take a punt there must surely be some upside potential on the back of either further news from the company on it exiting Boardwear or it signing an agreement with its bankers.

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