Sports Direct said it expects to increase profits by up to 15 percent this year after reducing losses at House of Fraser. In the first half ended October 27, sales on a currency-neutral basis decreased by 6.4 percent due to the chain’s continued elevation strategy. Revenues in U.S. operations were down due to store closings at Bob’s.

Key highlights

  • Group revenue increased by 14.0 percent. Excluding acquisitions, and on a currency neutral basis, Group revenue decreased by 6.4 percent due to the continued elevation strategy.
  • UK Sports Retail revenue increased 6.2 percent, largely due to acquisitions in the period. Excluding acquisitions revenue fell 8.6 percent as Sports Direct said it continued implementing its elevation strategy.  Premium Lifestyle revenue rose 79.2 percent largely due to new Flannels stores and a full period contribution from House of Fraser.
  • House of Fraser FY19 H1 figures included are for the 11-week period from acquisition in August 2018. FY20 H1 figures are for the full period. The prior period for Premium Lifestyle has been re-categorised to include House of Fraser Retail.
  • Game Digital Plc acquired 27 July 2019, revenue since acquisition was £133.9m.
  • European Retail revenue increased by 16.7 percent due to acquisitions in the period. Excluding acquisitions, and on a currency neutral basis, revenue fell 6.1 percent due to implementation of our elevation strategy.
  • Rest of World Retail revenue is down 8.5 percent. Currency neutral (6) Rest of World Retail revenue is down 12.5 percent, due to the rationalization of Bob’s stores in the US.
  • Group Underlying EBITDA is up 21.8 percent to £181.2m. Excluding acquisitions and on a currency neutral basis, Underlying EBITDA is up 15.1 percent largely due to improvement in the Premium Lifestyle and European Retail divisions.
  • Reported profit before tax is up 160.0 percent to £193.4m largely due to improved underlying EBITDA and the £84.9m gain (pre IFRS 16) arising from the sale and leaseback of the Shirebrook distribution centre.
  • Underlying profit before tax is up 58.1 percent to £101.8m, largely due to improved underlying EBITDA.
  • Profit after tax is up 214.7 percent to £150.1m from £47.7m in FY19 H1.
  • Underlying free cash generation of £162.3m
  • Net debt has decreased to £254.4m, from £378.5m as at 28 April 2019 (FY19 H1: £505.5m), largely due to improved underlying EBITDA and proceeds from the disposal of the Shirebrook distribution centre. The prior year included House of Fraser acquisition costs and associated working capital requirements.

Results by segment

UK Sports Retail

 The UK Sports Retail segment includes all of the Group’s sports retail and USC store and web operations in the UK, all of the Group’s sports online business, the Group’s Fitness Division, the Group’s Shirebrook campus operations, recent acquisitions of Game Digital UK, Jack Wills, Evans Cycles and Sofa.com as well as the Heatons Northern Ireland stores. UK Sports Retail is the main driver of the Group trading performance and accounts for 59 percent of Group revenue.

  • UK Sports Retail sales increased by 6.7 percent, excluding acquisitions revenue fell 8.6 percent due to the continuing elevation strategy. Sports Direct said it continues on target to open approximately 10 to 15 elevated stores during FY20.
  • UK Sports Retail gross margin increased by 280 basis points to 43.4 percent (FY19 H1: 40.6 percent). This was primarily due to improved USD hedging and an improved product mix.
  • UK Sports Retail’s operating costs increased by 20.4 percent to £385.6m (FY19 H1: £320.3m), largely due to acquisitions in the period.
  • The loss from associates totaled £5.6m (FY19 H1: loss £0.6m). The current period loss relates to the Groups share of losses reported from Game Digital in the period prior to obtaining a controlling interest.
  • UK Sports Retail underlying EBITDA decreased by 5.3 percent to £139.9m (FY19 H1: £147.7m) as a result of associate losses and acquisitions.

Premium Lifestyle

The Group’s Premium Lifestyle division includes the Group’s premium lifestyle fascia’s in the UK: Flannels, Cruise, van mildert and House of Fraser, along with their e-commerce sites.

  • Sales in the period were up by 79.2 percent to £282.6m (FY19 H1: £157.7m), largely due to the increased sales through new Flannels stores/online and a full 26-week period in FY20 H1 vs since acquisition on 10 August 2018 for House of Fraser in FY19 H1. Sports Direct said it is on target to open between 5 to 10 elevated stores during FY20.
  • GTV Gross margin increased to 36.8 percent (FY19 H1: 31.0 percent), due to an improved product mix and an increased move to an own bought model from concessions in House of Fraser.
  • Operating costs increased by 54.5 percent to £145.4m (FY19 H1: £94.1m) due to new Flannels stores and a full 26-week period in FY20 H1 vs since acquisition on 10 August 2018 for House of Fraser in FY19 H1.
  • As a result, Premium Lifestyle underlying EBITDA improved from a loss of £29.0m to a loss of £5.6m.

European Retail

The European Retail division includes the Group’s sports retail store management and operations in Europe, including the Group’s European distribution centres in Belgium and Austria, stores in the Baltic regions and Game Digital stores located in Spain. European Retail accounts for 17.9 percent of Group revenue.

  • European Retail sales increased by 16.7 percent, on a currency neutral basis and excluding acquisitions revenue fell 6.1 percent, due to moving towards a higher price point and higher margin product.
  • During the period, gross margin decreased by 210 basis points to 41.4 percent (FY19 H1: 43.5 percent), excluding acquisitions gross margin is up 180 basis points.
  • European Retail’s operating costs increased by 1.4 percent in FY20 H1. On a currency neutral basis and excluding acquisitions, European Retail’s operating costs decreased by 13.1 percent, mainly due to property provisions in the prior year and the effects of the rationalisation programme in place over the last few years.
  • European Retail underlying EBITDA increased by 71.4 percent to £32.9m (FY19 H1: £19.2m), excluding acquisitions and on a currency neutral basis, underlying EBITDA increased 64.7 percent.

Rest of World Retail

Rest of World Retail includes the U.S. operations of Bob’s and Eastern Mountain Sports as well as SD Malaysia.

  • Rest of World retail sales have decreased by 8.5 percent, on a currency neutral basis revenue fell 12.5 percent largely due to the rationalisation of the Bobs retail estate combined with implementing the elevation strategy.
  • Operating costs have decreased by 14.0 percent with the prior period containing additional provisions.
  • Rest of World Retail Underlying EBITDA was reduced to a loss of £2.5m from £4.9m a year ago.

Bob’s, which had 27 stores versus 30 a year ago. Other stores in the group include Eastern Mountain Sports, which had 21 stores versus 20 a year ago. The final store segment is SD Malaysia had 33 stores against 30 a year ago.

Wholesale & Licensing

The Wholesale & Licensing division operates its globally renowned heritage Group brands, and its wholesale and licensing relationships across the world, as well as partnerships with third party brands that it licenses to sell in Sports Retail and Premium Lifestyle divisions. Brands include Donnay, Slazenger, Firetrap, Everlast, Kangol, Karrimor and Lonsdale, among others.

  • Wholesale & Licensing division total revenue increased by 14.9 percent to £92.0m (FY19 H1: £80.1m). Wholesale revenues are up 19.0 percent to £77.8m (FY19 H1: £65.4m), excluding acquisitions wholesale revenue is up 9.8 percent.
  • Licensing revenues in FY20 H1 decreased 3.4 percent to £14.2m (FY19 H1: £14.7m).
  • Wholesale gross margin decreased by 30 bps to 28.3 percent (FY19 H1: 28.6 percent). Total gross margin therefore decreased to 39.3 percent (FY19 H1: 41.7 percent) with a fall in licensing revenue which is at 100 percent margin.
  • As a result, underlying EBITDA in the division increased 4.4 percent to £16.5m (FY19 H1 £15.8m).

Guidance

Mike Ashley, CEO, wrote in a statement, “I am very pleased with the strong underlying EBITDA growth in the context of the significant challenges facing the High Street. We remain focused on our elevation strategy, which continues to go from strength to strength, benefiting all stakeholders.

“At the full year FY19 results, we concluded we could not reasonably predict where our FY20 results were going to land based on the uncertainty caused by the House of Fraser acquisition and the “significant operational and investment issues we are trying to rectify based on the appalling mismanagement of House of Fraser, prior to its acquisition by the Sports Direct Group, that led to its downfall.”

“As noted in the Chairman’s statement and below, House of Fraser is all but fully integrated into the Group, and is a work in progress to fix. The longer-term estate is still in the main to be concluded upon. However, given the seasonality of House of Fraser, something in the longer term we hope to address is the reliance on the Christmas period, and the fact our House of Fraser store estate – at least over this Christmas period 2019 – is secure means we are able to give Group guidance as we are confident in the outturn including House of Fraser.

“Based on the above we believe our total Group underlying EBITDA (including House of Fraser but pre IFRS 16 adjustments) will grow between 5 to 15 percent from the FY19 pre-House of Fraser underlying EBITDA figure of £339.4m. This gives a range of between £356.4m to £390.3m for the year ending 26 April 2020.”

Statement  From David Daly, Non-Executive Chair

INTRODUCTION

“I have now been Chair for just over a year. It has been an eventful but rewarding time to be involved in the company. We have experienced some challenging events which included a significant tax inquiry in Belgium and the continued integration of a broken House of Fraser business into the Group.

“We continue to maintain that the Belgian tax issue will not lead to material liabilities and we are committed to finding a resolution as soon as possible.

 “I am very proud of the results we have achieved during this half year period and what the Group has achieved during a very tough and challenging retail environment.”

 OVERVIEW

“The first half of FY20 has shown impressive results across the Group with the Elevation Strategy proving to remain the right plan for the Group’s growth and future. New flagship stores have continued to open including our stunning new Flannels flagship store in September 2019. We have had amazing feedback from various stakeholders including the brands and I want to thank everyone involved in making it happen.

“Whilst revenue across the Group, excluding acquisitions and currency movements, has declined 6.4 percent, Underlying EBITDA excluding acquisitions and currency movements has increased 15.1 percent, and including acquisitions and currency movements has increased 21.8 percent, which in a very difficult retail environment is a fantastic effort. This is showing the improved product mix we are getting access to driving higher margins with less units, together with improved processes and procedures driving efficiencies, is showing tangible results.

“In terms of statutory reporting pre IFRS 16, our profit before taxation has risen 160.0 percent, driven largely by the improved trading result and profit on sale and leaseback of the Shirebrook campus.

“Our net debt at the half year was £254.4m compared to £505.5m a year ago as we continue to generate significant cash flows in the Group, and acquisition expenditure and the investment in those acquisitions reducing year on year, although we would note that completion of the purchase, including the final bullet payment, of the Frasers store in Glasgow will mean expenditure will increase in second half of the year.”

 HOUSE OF FRASER

“We are starting to see the green shoots of recovery as we continue to integrate the business into the Group. We are bringing new disciplines, experience and skills to bear which is helping the turnaround. Our Frasers strategy is to create a superior shopping experience for the consumer which will be led by the original Frasers. In the coming months and years, Frasers will prove to be a vital and successful part of the Group.”

ACQUISITIONS

“We acquired the trade and assets of Jack Wills from administration during the period. We believe in the brand and we think it will be a great asset to the Group, particularly in the House of Fraser and USC fascia’s.

 “We have also taken control of Game Digital plc. We believe the BELONG eSports arenas could be a great fit for the retail space within in the Group will help drive consumer footfall. I would like to welcome our new colleagues to the Group and we look forward to successfully driving the business forward together.”

 OUR PEOPLE

“Our people have always been and continue to be a priority and the Board is committed to treating all staff with dignity and respect. Despite high profile hysteria from certain politicians, we are one of the only listed companies in the UK to have a workers representative. Cally Price is a statutory director and is manager of our Sports Direct store in Cardiff. Cally does an excellent job of bringing the shop floor reality to the Boardroom and is a fantastic resource to us, enabling us to hear first-hand about issues that are of concern to our employees. The Board have acted on several initiatives which were proposed by Cally and she is a fine example of true and effective Corporate Governance in action. We would thoroughly recommend that other listed companies take the steps to appoint an employee elective representative to the Board. Our experience has been a very positive one.”

DIVIDEND

“No dividend was paid during the half year period and the Board has decided not to declare an interim dividend in respect of this period. The Company did undertake a share buyback during the half year with the total number of shares purchased in the market being 14,748,480 since 1 May 2019.”

OUTLOOK

“We continue to focus on delivering elevated retail experiences for our consumers. We are on track to complete our stated store elevation plan by the end of the financial year.

 “The completion of the purchase of the Frasers store in Glasgow will allow us to showcase our elevation strategy and intentions for the remaining portfolio of stores.

 “As we grow, it is important we continue to recruit new talent. In January 2020, a new Head of Internal Audit will join the Group. We are also committed to promoting our highest achievers and offer a development pathway to our talented employees.

“We are hoping that the political waters will be calmer in the coming months which will allow us to move out of this period of market unpredictability. This will enable us to plan appropriately for the future which is critically important.

“Despite ongoing challenges, we believe we are getting into a good place, building a solid foundation of elevation and efficiency which will lead to sustainable growth and a successful future.”

The full statement is here.

Photo courtesy Sports Direct