Company Analysis Sports Directt Plc

A description of what business the company is involved in and where it operates

Sports Direct has worldwide presence apart from its major operations in the U.K.in the retail sector supplying sports goods. The entity is having a wide array of branded goods use in the field of sports which include apparatus for workouts, dresses, shoes, and allied items. It deals with leading brands like Addidas, Nike, Reebok and Puma. The company’s group has its own brands such as Dunlop, Slazenger, and Lonsdale. The entity has its own retail outlets as 100 percent owned in four neighbouring countries. It has joint ventures with leading retailers in Northern Ireland and the Republic of Ireland and Cyprus, such as Heaten stores. Its wholesale division supplies core products such as Dunlop Tennis Rackets, Slazenzer Tennis Balls to wholesale dealers throughout the world thus expanding its market beyond its own stores outside U.K. The wholesale business also deals with children’s wear and others. The brands division of the company sponsors world’s leading sports events and enjoys the loyalty of the world’s high profile sports celebrities. Slazenzer tennis ball has been the official ball for the Wimbledon Championships until now. Dunlop has sponsored a professional team which is in the growth mode with the induction of world’s top tennis players Nikolay Davydenko and Fernando Verdasco. Dunlop’s sponsorship is proud of golf players like Darren Clarke and Lee Westwood being within its fold. Slazenzer has also sponsored international cricket captains Paul Collingwood and Michael Clarke. Dunlop and Carlton also enjoy the opportunity of sponsoring badminton and squash events. Some of the boxing brands such as Lonsdale that has completed fifty years and Everlast with 100 years history are under the fold of Sports Direct. These products come from the specialists who manufacture combat sports equipment and apparel with sponsored boxers and martial arts fighters (SportsDirect.com 2010).

The origins of the company and how it has developed to its position today

Former county squash coach Mike Ashley started this company in the name of Mike Ashley Sports in 1982. The founder started several outlets for sale of goods used in sports and skiing in the city of London and in its neighbourhood. The shop under Sport Direct was first opened in 1982 in Maidenhead. Preston Sports shop was opened in the city after two years and in similar fashion 12 shops were started within the next ten years. Four year later, name was rechristened as Sports Soccer. and it Dunstable became the location for both office and warehouse with a space hundred thousand square feet. The purchase of Donnay brand increased the chain’s length to fifty stores. New business Disport in Belgium added another twenty two chains aggregating to eighty stores in all the entity by the millennium.. Lillywhites and the “Lonsdale” were purchased in two thousand two aggregating to one hundred fifty stores by the year two thousand three. Ten more brands were purchased after one year. Entirely new location for office and stores in the year two thousand six was chosen… The number of stores increased to four hundred seventy six after the purchase of five more brands. Company in the next year. In the year two thousand eight, eight more brands were purchased. It sold Original Shoe Company and later disposed Streetwise in 2008/09. In 2010, the company acquired the minority interest of the U.S.A.’s golf, sporting and leisure goods wholesaler Antigua Enterprises Inc and got the company delisted from Toronto Stock Exchange. It acquired 7 % of stake in Heatons’ parent company Warrnambool thus increasing its shareholding in Warrnambool to 50 %. (SportsDirect.com n.d.).Online revenue of the company though Sportsdirect.com fascia from 331 stores contribute 7.7. % of total sales and it will reach 10 % next year. (SportsDirect.com n.d.)

Five year share price analysis

Normalised EPS for Sports Direct Plc

2011 2010 2009 2008 2007
EPS 14.34 16.22 10.92 6.29 20.95

Five year share price analysis

Share price change 2007 2008 2009 2010 2011
Percentage of change -51.87% -57.28% +122.05% +64.07 % +88.40 %

Two year ratio analysis

Common Size Income Statement Sports Direct Plc

Particulars 2011 % 2010 %
Sales 1,599,237 1,451,621
Cost of sales (940,330) (862,490)
Gross profit 658,907 589,131
Selling, distribution and administrative expenses (527,273) (524,611)
Other operating income 5,289 3,493
Exceptional items (2,252) (9,986)
Operating profit 134,671 58,027
Other investment (cost)/income (9,481) 24,653
Finance income 2,560 40,150
Finance costs (8,953) (10,528)
Share of (loss)/profit of associated undertaking and joint ventures (8) 7,200
Profit before taxation 118,789 119,502
Taxation 35,566 30,286
Profit for the period 83,223 89,216

Common Size Balance Sheet Sports Direct Plc

Particulars 2011 % 2010 %
Assets
Non-current assets
Property, plant and equipment 236,097 25.77 270,918 28.21
Intangible assets 205,050 22.38 216,944 22.59
Investment in associated undertakings and joint ventures 038,347 4.19 038,742 4.03
Available-for-sale financial assets 053,097 5.80 51,566 5.37
Deferred tax assets 013,443 1.46 010,101 1.05
Total 546,034 59.60 588,271 61.25
Current assets
Inventories 217,938 23.79 218,803 22.78
Trade and other receivables 091,705 10.01 114,533 11.93
Derivative financial assets 013,648 1.42
Cash and cash equivalents 060,513 6.60 025,121 2.62
Total 370,156 40.40 372,105 38.75
Grand Total assets 916,190 100.00 960,376 100
Equity and Liabilities
Share Capital 64,055 6.99 64,050 6.67
Share premium 874,300 95.42 874,300 91.04
(Reserves) (1078,494) (117.72) (1078,494) (112.30)
Reserves 36,318 3.96 48,688 5.07
Retained earnings 434,567 47.44 349,788 36.42
Non-controlling interests 389 0.05 1,383 o.14
Total equity 331,135 36.14 259,715 27.04
Non-current liabilities
Other payables 2,345 0.24
Borrowings 196,182 21.41 3,352 0.35
Retirement benefit obligations 16,186 1.77 19,739 2.06
Deferred tax liabilities 28,238 3.08 35,946 3.74
Provisions 58,277 6.36 45,598 4.75
Total 298,883 32.62 106,980 11.14
Current liabilities
Derivative financial liabilities 5,984 0.65
Trade and other payables 234,851 25.63 240,664 25.06
Borrowings 13,219 1.44 333,659 34.74
Current tax liabilities 32,118 3.52 19,358 2.02
Total 286,172 31.24 593,681 61.82
Total liabilities 585,055 63.86 700,661 72.96
Total Equity and Liabilities 916,190 100.00 960,376 100

Liquidity ratios indicate an entity’s ability to make available funds to meets its immediate needs. Commonly used current ratios are (1) Current ratio, (2) Quick ratio, and (3) Net working capital to sales ratio.

Current ratio which is the proportion of current assets against current liabilities is useful to verify if a company can meet its current liabilities with its current assets.

Formula: Current ratio = Current assets/Current liabilities

Quick Ratio which is the proportion of quick assets i.e current assets minus inventory against current liabilities shows the company’s capability to meet its current liabilities from the proceeds of its most liquid part of its current assets consisting of cash and receivables.

Net working capital to sales ratio is the proportion of net working capital against sales and it is an indicator of company’s short-term obligation in relation to sales.

Net working capital to sales ratio= (current-current liabilities)/Sales

Liquidity ratios of Sports Direct Plc

Particulars 2011 2011 2010 2010
Current ratio 370,156/286,182 1.29 372,105/593,161 (0.63)
Quick ratio 152,218/286,182 (0.53) 153,302/593,161 (0.26)
Networking capital to sales ratio 83,974/1599,237 0.05 -221,056/1451,621 -0.15

Profitability ratios

These ratios are (1) gross profit margin, (2) operating profit margin, (3) net profit margin. Gross profit margin is the ratio of gross profit to sales. This shows the amount every dollar of sales remain after meeting cost of goods sold. Operating profit margin is the income before interest and taxes against sales and shows how much of every dollar of sales is remaining after meeting operating expenses. Net profit margin is the ratio of net income to sales and shows how much of every dollar of sales is remaining after all expenses.

Profitability ratios of Sports Direct Plc

Particulars 2011 2011 2010 2010
Gross profit margin 658,907/1599,237×100 41.20% 589,131/1451,621×100 40.58%
Operating profit margin 134,671/1599,237×100 8.42 % 58,207/1451,621×100 4.01%
Net profit margin 83,223/1599,237×100 5.20% 89,216/1451,621×100 6.15%

Financial leverage ratios

A company can be financed to acquire assets by raising loans (debt) or capital (equity). If financed by debt, then the company has to pay interest to lenders. If financed by equity, the company has to pay dividends to shareholders. Some may argue, dividend need not be paid. Although non-payment of dividends can add to the company’s capital as retained earnings and ultimately payable to shareholders, shareholders who are in need of regular income will not have the incentive to invest on the company’s shares. Hence companies cannot avoid payment of dividends on regular basis. Hence both ways, it is a commitment to the company. Company will therefore maintain both equity as well as debt for which purpose Debt equity ratio is useful.

The ratio is obtained as Total debt/total shareholders’ equity. This indicates relative uses of debt and equity as sources of capital. Usually book value of equity alone is taken into account although market value of equity will be far higher in case of long established companies.

Debt equity ratio, ROA, ROE of Sports Direct Plc

2011 2011 2010 2010
Debt equity ratio 585,055/331,135 1.77 700,661/259,715 2.70
.
Return on Assets (Net profit after tax/total assets)
83,223/916,190×100 9.08%* 89216/960,376×100 9..29%*
Return on Equity (Net profit after tax/total equity) 83,233/331,135×100 25.13%** 89,216/259,715×100 34.35%**

*ROA is also calculated with income before taxes and interest

**ROE is also calculated after deduction of preferred dividend from net income

SWOT Analysis

The strengths, weaknesses, opportunities and threats for the company

Strengths

  • 18,000 employees
  • UK Retail space 3.8 m sq.ft in 393 stores
  • International Retail space 778,000 sq.ft in 118 stores
  • Presence in nine countries including U.K.
  • Dealing with leading brands: Dunlop (leading sports equipment manufactures with 70years standing, , Donnay (100 years in tennis ) , Everlast (100 years in boxing ) , Title (fight sports of prestige) , Lonsdale (boxing brand ), Voodoo dolls (the women only surf brand) , Karrimnor ( outdoor equipment used by world’s most experienced mountaineers) , Golddigga, Carlton (150 year old badminton brand) , Sondico, Kangol, USA Pro, No Fear, LA Gear, Slazenger ( established in 1881) , Antigua, Campri (since 1960) and Nevica.
  • In October 2010, the company was cleared of investigation by Serious Fraud Office.
  • Employees bonus share scheme announced in 2010 improved performance for the past two years. The company is set to launch a four year scheme beginning from 2012.
  • Total sales exceeded by ten point two percent..
  • Its gross profit exceeded by sixty basis points.
  • Group EBITDA increased by twenty four point nine percent.
  • Pre-tax income was up by thirty two point two percent.
  • Limited increase in capital expenditure.
  • Reduction in finance costs.
  • Savings in cost of dividends.
  • Group’s in house specialist in trademarks and licences mitigates risks related regulatory requirements (SportsDirect.com 2011).

Weaknesses

  • No dividend paid this year
  • Retail division operating costs
  • Brands division operating costs
  • Highly competitive market both in domestic and international levels.
  • There were frequent breakdowns in the running of vehicles resulted in delayed deliveries and missed deadline.
  • Long term interruptions in the I.T. systems could impact on operations.
  • Majority of revenue from U.K. subject to risks of terrorist attacks, armed conflicts and government actions which can reduce customer confidence.
  • Trademarks, patents, designs and other IP rights which are crucial to the value of brands owned or dealt with by the company, are often subject to challenges from third parties as regards ownership or counterfeiting. Though the group emerges successful in litigations, the cost of litigation and uncertainty involved in court decisions impact on the group’s operations (SportsDirect.com 2011).

Opportunities

  • Large scale sports activities being sponsored by developing countries’ authorities offer unlimited opportunities for business.
  • Forthcoming London Olympics 2012

Threats

Risk factors
  • Disruption in supply chain will affect group’s business, operating profit, and overall financial condition.
  • Group’s reliance on manufacturers in developing countries is subject to risks associated with international trade.
  • Foreign transactions are subject to volatility of foreign exchange rates.
  • Credit risk due to non-evaluation of credit worthiness of some reputable customers.
  • Investment risks on investments made in publicly listed companies.
  • Risk of increased liability under some pension schemes.
  • Environmental disasters from “volcanic ash clouds” being unpredictable, they remain a serious threat to their operations (SportsDirect.com 2011).

Reflection from analysis and conclusion

Sports Direct Plc started in 1980s is a bold venture by the founder considering high competition prevailing and the vagaries of sports polices of the governments around the world. Ashley rightly took the decision to promote the chain of stories sensing the potential in sports as a key to human development. Company results have improved in terms of sales from 2010 to 2011by 10.2 % though there is fall in net profit compared to previous year. Current ratio has improved to positive 1.29 from negative 0.63 in last year. Similarly quick ratio has also improved. There improvements in gross profit margin and operating profit margin from the year 2010. Net profit is down by 0.95 % and it because of higher taxation incurred in the year 2011. Debt equity ratio has improved in the year 2011. ROI and ROE have reduced from last year 2010. Both are obviously due to fall in profits caused by higher taxation. Share prices changes for the five year period up to 2011. Except for the for the years 2007, 2008 showing negative changes of 51.87 % and 57.28 % respectively, changes for the subsequent years are positive as 122.05 % for 2009, 64.07 for 2009 and 88.4 % for 2011. Company claims to have reduced the net debt by 52.3 % to GBP 148.9m from GBP 311.93 m in 2010. Although the earnings per share has increased from 12.39 p to 16.83 p, that is up by 52.3 %, company has decided not recommend a final dividend. Its TV advertising campaign from 2010 is likely give positive results in the long run. One feature worth mentioning is the company’s employee bonus scheme. In this connection, the company reports that this has been a good source of motivation and about 2,000 employees have already been benefited by the scheme. Target for the years 2102, 2013, 2014 and 2015 are EBITDA of GBO 215, 250, 260 and 300 respectively. An area of concern is the increase in the incidence in accidents which have increased from 1,428 accidents in 2010 to 1689 accidents in 2011, although the increase is proportional to the increase in the number of stores. The company’s must be zero accident policy since they are not involved in hazardous operations. Company has not included the value of self generated brands and all the acquisitioned brands have been shown only at cost though the company is free to show its fair value reflecting current market. Company’s belief in the traditional approach is really to be appreciated and not distorted share prices. However, the company still remains to be a preferred buy due to consistent policies and efficient management of resources.

References

InvestorsChronicle 2012. Sports Direct International PLC, Web.

MorningStar 2011. Morning Star Stock Report :Sports Direct International PLCSPD. Web.

SportsDirect.com 2010. Annual Report. Annual Report, Sports Direct International Plc,

SportsDirect.com. Annual Report 2011. Sports Direct International PLC, Web.

SportsDirect.com n.d. History Sports Direct Plc, 2012. Web.