The inexorable rise of Sports Direct continues. Thanks to the tireless toil of legions of zero-hour ‘colleagues’, the bargain sporting goods store returned imperious first half results today. Revenues rose 6.5% to £1.4bn in the 26 weeks to October 26th, while underling pre-tax profits grew 9.8% to £160.6m.
Its results don’t include same store sales, effectively allowing new shops to disguise potentially worse performances from older ones. But they do indicate that the core Sports Direct retail business increased revenues 8.3% to £1.2bn, of which £176m was in the increasingly important online sector - a rise of 11.1%.
That all might seem pretty decent to most people, but it’s apparently not enough for owner Mike ‘Caesar’ Ashley or his lieutenants. Chief executive Dave Forsey said the results were merely ‘solid’, given England’s early exit from the World Cup (think of the tragic waste of all those unsold Rooney shirts) and the muggy, footfall-reducing autumn.
The fact is, Sports Direct (or should it be Imperium Ludum Directum?) is still expanding at an impressive rate. Over the period, it opened 13 new stores in the UK, bringing its total to 434, while continuing its conquest of continental Europe with eight store openings there.
On top of that, it also acquired four Debenhams concessions (which one must presume are worth it given the amount of effort Mike Ashley’s gone to get them) and 18 gyms, the first of which will open this month under the SportsDirect Fitness.com name.
The firm attributes its success to the performance-related employee bonus scheme, under which ‘colleagues’, many of whom are on controversial zero-hour contracts, can receive over six million shares with a combined current value of £41m, if Sports Direct meets its EBITDA (earnings before interest, tax, depreciation and amortisation) targets.
It seems to be working. Forsey said he ‘remains confident of achieving at least our full year internal underlying EBITDA target of £360m’, which would lead to 25% of the employee bonus shares vesting in 2015.
Of course, no attempt at world domination goes off entirely without a hitch. Revenues from Sports Direct’s brand business contracted 3.9% to £102.1m as the firm ‘updates its wholesale business model’. At the same time, its Premium lifestyle division suffered a similar fate, with revenues dropping 2.8% to £99.9m, ‘largely due to the closure of loss-making USC and former Republic stores’.
Acquiring those firms isn’t the only bad move Sports Direct has made. Mike Ashley’s put option on Tesco shares in September can’t be looking too hot right now, given the supermarket’s recent 15% share slide.
Under the terms of the deal with Goldman Sachs, Sports Direct will have to buy shares at higher-than-market levels or pay a cash equivalent if the Tesco price falls below a certain, undisclosed level, potentially losing up to roughly £40m. Ashley might do well to heed the lesson here from the Romans, and Tesco for that matter – one cannot expand forever, and when there's no way up, the only way left is down.