By John Hughman , 27 April 2012
While I’m on the subject of sport, I’m going to turn my attentions to Sports Direct. The sporting goods retailer updated on trading earlier this week, and it’s fair to say things there are going very well indeed. Sales in the nine weeks to 25 March jumped 13 per cent to £268m – faster than the 10.7 per cent in Q3 - with gross profits up a similar amount to £100m.
Not that we should be surprised, and I’m kicking myself for not piling into the shares when they reported their results back in December, when the shares were 198p. Although we said we’d be looking to upgrade to a buy if the shares weakened, they haven’t, climbing 50 per cent to hit 296p today. I’m especially annoyed with myself, because I should have paid more attention to the fact that the Ebitda targets that the company had set itself to make sure staff and executive bonus schemes would kick in were going to be easily beaten. “The Group is now certain of reaching the full year targeted Ebitda of £215m and the ‘super-stretch’ [bonus] target of £225m”, it said in interim management statement back in February. That’s now been confirmed, and means that founder, 71 per cent shareholder and executive deputy chairman Mike Ashley’s own “Super-Stretch Executive Bonus Share Scheme” is activated. He’ll pick up 8 million shares should three further – and extended - Ebitda targets are hit in the next three years.
Of course, Mr Ashley is already a very rich man, and as analyst Philip Dorgan at Panmure Gordon points out, “it should be remembered that these targets are intended to ensure that the group hits its maximum Ebitda every year, as an extra 8m shares means little difference to him personally”. But the bonus scheme does mean a great deal to his staff. This year, 2,000 employees will receive an average of 17,000 shares each as a result of hitting targets in 2010 and 2011 – at today’s share price that’s around £50,000, and with rewards like that in sight it would be a rather foolish punter that would bet against Sports Direct delivering the £300m Ebitda the scheme demands in 2015.
Mr Ashley can’t force shoppers to buy from it, though, nor can he doing anything about the grim consumer backdrop. But I increasingly believe that like Primark - or Aldi and Lidl in food retail - the Sports Direct formula should mean the business is set to thrive even in these straightened times. I used to turn my nose up at its jumbled stores and chavvy clothing, but I’ve changed my tune. It’s not that I’m any more of less hard up than I used to be, but I’m not so rich that saving a few quid here and there doesn’t make a difference. I’ve become almost obsessive about checking prices online before I buy anything, but I know that if I walk into a Sports Direct to buy something I’m not going to find it cheaper anywhere else.
I’d also argue that the Sports Direct shopping experience is slowly changing for the better, too. The stores are neater (at least the one near me is), and the brands and ranges it carries (many of which it owns itself) are improving all the time, and cover a good spread of price points to keep it relevant to as many shoppers as possible. Amongst other things, I’ve recently splashed out on cycling clothes, camping equipment, walking boots and rucksacks. I say splashed out, but it was all dirt cheap and, for the prices I paid, unbelievably good quality. Perfect for a casual sportsman like myself.
I’m still hopeful that I’ll get the opportunity to buy into this story at a cheaper price at some point, but do wonder whether instead to just take the plunge and hitch a ride on Mr Ashley’s gravy train now. Sports Direct’s shares may have climbed 825 per cent since hitting post IPO lows in 2008, and trade on a punchy looking forecast PE ratio of 16. But that falls to 13 in 2013, and analysts are undeterred – according to Bloomberg, 7 of the 11 brokers covering it rate it a buy, with several pointing to its ability to improve penetration of online sales from the current 10 per cent, especially as it expands overseas. Judging by the recent international success of Primark in Germany and Spain, I think Sports Direct will find that its formula goes down well in international markets – indeed, Primark has proved so successful that its now suffering from counterfeiting, usually more of a problem for luxury goods brands (as reported by former IC journalist Rory Jones who now writes for the UAE’s biggest English Language paper, the National).
Many, naturally, will still be suspicious of Sports Direct given its somewhat patchy record on corporate governance – the unwillingness of Mike Ashley to engage with the City was, after all, was at least partly behind the the precipitous slide in the share price after the company’s IPO in 2007. The shares are, after five years, almost back to the IPO price, but today you’re getting a very different business for your money – and, judging by the senior appointments he’s made to improve corporate governance, a very different Mike Ashley, too. The uninvestible may have finally become investible.