Sports Direct: The Good, The Bad And The 30% Upside

Summary

  • Sports Direct poses an efficient model ready for international expansion.

  • Overly aggressive negative sentiment providing buying opportunities.

  • Fundamental research in this article indicates a 30% upside potential.

Introduction

Mike Ashley, who owns a 55.14% stake whilst also being deputy chairman, founded Sports Direct (OTC:SDIPF) in 1982. Today it has expanded to become the UK's leading sports retailer by revenue and operating profit and also the owner of a significant number of sport, fashion and lifestyle brands. Currently it operates 420 stores in UK and 270 stores across 19 European countries, with the plan to expand into all major EEA countries over the next 3 - 5 years. The firm operate through three business segments: Sports retail, Premium lifestyle and Brands. Through acquisitions including Warrnambool in October 2015 and Kensington Health Clubs Ltd December 2015, SPD has consolidated its position as market leader. Moreover, in October 2012, the company purchased the rival retailer JJB's brand name, website, stores and all of their stock in a deal worth approximately £24m.

A recent investigation in December 2015 suggested that many employees were effectively being paid under the minimum wage. The firm's practices such as fines for late or slow work and 15 minutes of unpaid searches at the end of each shift contribute to many staff being paid an effective hourly rate of about £6.50 against the statutory rate of £6.70. MPs have called for HMRC to investigate these claims, however none of them have been confirmed thus far. The retailer also announced a profit warning revising a £420-380m EBITDA target to £380m. The retailer also stated that this might be attributed to mild winter, which generated worse-than-expected sales. This negative publicity has caused the shares to plunge 50% from 736.5p on 1 st December to 370.9p on 1st of April.

Sports Retail Market

SPD hold a dominant 22.5% of the sports and fitness UK market share, overtaking its rival JD Sports by more than ten percentage points. The company now operates in around 690 stores worldwide, 420 of which are in the UK.

The recent years have seen the demise of Allsports and JJB Sports, together with troubles at leisurewear specialist Blacks & Millets, however the retail sports market as a whole has been relatively successful having grown around 19% since 2008 and SPD have profited from this favourable environment. This can be attributed to the firm's simple policy of having a wide assortment of good quality products and selling at extremely low prices.

SPD took great advantage of JJB' collapse, increasing market share by 0.5 percentage points ...

To view the full article, please find it on SeekingAlpha.com here


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