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Sports Direct fan club grows as management focus intensifies

There have been periods since its flotation in 2007 when Sports Direct was completely friendless in the City but times have changed and a flurry of brokers’ ‘Buy’ notes over the past few days has shown it to be an increasingly popular retailer. By Glynn Davis, City editor

CITY & CORPORATE

Sports Direct fan club grows as management focus intensifies

There have been periods since its flotation in 2007 when Sports Direct was completely friendless in the City but times have changed and a flurry of brokers’ ‘Buy’ notes over the past few days has shown it to be an increasingly popular retailer. By Glynn Davis, City editor

This attention has helped propel the share price sharply upwards and will ensure that (unlike at the time of its preliminary results in July) no analysts will be surprised on the upside when Sports Direct issues a trading update on Wednesday (September 9).

From within a trading range of 85p to 90p through August and early September the shares have sharply broken out to currently stand at 119p. The realis

ation in the City is that the company has largely been left behind in the radical re-rating of the sector over the course of the year.

Even after this burst the company is still rated on a modest 11.7x earnings for 2010 and less than 10.6x for 2011, which represents a discount to the general retail sector. However, it is questionable whether this disparity will last because some of the forgotten virtues of the Sports Direct model and strong results from its 'Back to Basics' initiative are beginning to come clear to the financial community.

It is fair to say that management at the company has long been distracted by a constant stream of issues, disputes, and economic disturbances since it floated and that for the first time there is some evidence that it has got its act together. It is now pursuing a path that appears to be favourable to shareholders and not just based on the whims of founder Mike Ashley.

The timing of this return to form is also proving beneficial as England look highly likely on Wednesday to confirm their place in the World Cup Finals next year that will turn on the tap of sales of England replica kits. With JJB no longer the force it was in 2007 Sports Direct looks set to generate up to 50 million of sales from the tournament, which will translate into 3 million of incremental operating profits.

The company is making broader progress on sales growth with 2009 showing an impressive improvement on the weakness evident in 2008. The most amazing component of this for many people will be the shift in the stores from looking like a jumble sale to something almost orderly.

Fuelling this radical change is an improved bought-in range, the strengthening of its own brand offer, and acquisitions of new names. Sports Direct is also focusing on JJB's former ground of 'serious about sport'. Such a stance would have been laughable this time last year but if it really is taken seriously then it is certainly an area of opportunity as equipment represents only 10 per cent of group sales.

Further potential lies in its online operation, which currently accounts for only a piddling two per cent of total sales, and the overseas division that comprised 63 stores. The infrastructure is in place for growth in both these areas and the level of focus management places on them will largely determine the level of increased contribution they make in forthcoming years.

There is certainly growing evidence to suggest the team (primarily Ashley) are putting plenty of focus on returning Sports Direct to a real powerhouse in its category. This will be a concern for others in the market and those looking to increase their foothold in the sector but will please investors no end - even those that are only just buying into the story of Sports Direct as a focused operator.

glynnd@theretailbulletin.com

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