Battered JJB back under the cosh
Still reeling from five separate investigations into its affairs, JJB Sports has suffered yet another blow. James Thompson reports
Tuesday 20 October 2009
One of JJB Sports's biggest shareholders sold more than half of its shares in the troubled sporting equipment retailer yesterday before the result of its £100m fund-raising emerges next Thursday. Crystal Amber Fund said it had made a profit of 45.3 per cent on the share sale at 32.6p, and would take up its entitlement from the share placing.
Despite the transaction being related to Crystal Amber – which now owns a 5.45 per cent stake in JJB – raising the necessary funds to take up its rights, the sale is hardly a ringing endorsement of its confidence in the retailer.
In fact, yesterday's announcement was just the latest blow for JJB after a year of allegations and controversy that most retailers would be disappointed to experience in a decade.
For starters, JJB in 2009 has dismissed its chief executive, Chris Ronnie (who strongly denies any wrongdoing), nearly collapsed into administration in March, and become embroiled in five investigations by prosecutors and regulatory bodies.
Over the summer it also emerged that its executive chairman, Sir David Jones, had taken a £1.5m loan from Mike Ashley in 2007, which he has repaid. And last week, JJB said it was the target of "malicious and vicious" rumours in the City designed to derail its £100m share placing and open offer, which it unveiled on 12 October and is critical to its survival. The allegations were that Jayne Sharpe, daughter of David Whelan – the former chief executive of JJB and owner of the Premier League football team Wigan Athletic – made payments into Sir David's bank account, but they were proven to be false.
However, they illustrate the tortured dealings of the sportswear retailer sector and its colourful characters, as well as the treacherous steeplechase that JJB has had to negotiate to put itself in a position to be confident about its survival. Katharine Wynne, an analyst at Investec, said: "The key thing over the last two weeks is that they appear to have got away a £100m issue – which looks to secure the financial future of the business and is about double what we had anticipated. One assumes that all the shenanigans fell out of someone else wishing to ensure that did not happen."
As a result, JJB looks to have averted falling into an early grave, ahead of notifying the market on 29 October about its £100m share placing and open offer. But after a series of disastrous management decisions over the past two years, doubts remain about whether it can ever regain its lofty position as one of the nation's premier sporting retailers.
The company said last month that its stores – which have been bereft of product for months – will not be fully stocked for the critical Christmas trading period. Matthew McEachran, an analyst at Singer Capital Markets, said: "They will have to shoulder some heavy trading losses over the second half [of their financial year], primarily because of the issues around stock."
He added: "The reality is that the money has been raised in the absence of any firm evidence. Normally a retailer takes iterative steps to its end destination, but they are making a huge leap."
For the 26 weeks to 26 July, JJB posted an adjusted operating loss of £42.5m, compared with a profit of £1.9m the year before, on sales down by 21.3 per cent to £167.3m.
At the heart of its stock crisis has been credit insurers scaling back insurance cover to the retailer's suppliers and a lack of working capital to replenish its depleted shelves. JJB has also not been helped by the sportswear industry's lengthy lead times of six months for sourcing goods from the Far East.
But a JJB spokesman said the situation was improving. "The stock position is building up again and by the fourth quarter they will be 70 per cent there, and by the first quarter of 2010 they will be back to where they want to be with 100 per cent stock."
He added: "They have not had the working capital flexibility to buy the stock that they wanted, but now they have done the fundraising and also refinanced their working capital facility they will be in a better position to buy stock."
However, the rot at JJB had set in long before it entered into the most tumultuous year in its history in 2009. On the watch of its former chief executive, Mr Ronnie, the retailer made a disastrous move into the fashion and footwear market with two ill-fated acquisitions.
In June 2007, Mr Ronnie had shocked the world of retailing by buying a 29.9 per cent controlling stake in JJB from its founder, Mr Whelan, for £193m, although this shareholding was subsequently diluted to 27.5 per cent. Mr Ronnie, the former right-hand man to Mike Ashley, founder of the rival retailer Sports Direct, financed the deal through his investment vehicle Exista, backed by the Icelandic bank Kaupthing.
Ahead of the Icelandic banking sector falling down the country's geysers in late 2008, Mr Ronnie sanctioned the acquisitions of Original Shoe Company (OSC) for £5m in December 2007 and then the loss-making Qube fashion chain six months later for £1. Mr McEachran said: "That looks to have been a very stupid strategy."
In February 2009, JJB gave its own final verdict on those acquisitions by placing both Qube and OSC into administration after its lifestyle division sunk to a £15m loss in the year to 25 January.
Looking to the year ahead, JJB and its management team – particularly Sir David, who is 66 and battling Parkinson's disease – will be hoping that it bring far less drama and controversy. While it will not show up in any profit and loss account, JJB's directors have been hugely distracted by the almost endless stream of allegations and investigations. "In the short term, it has been unhelpful, and management will say they have been distracted," says Mr McEachran.
JJB is now involved in five regulatory investigations. Of these, the Financial Services Authority is looking into the malicious rumours behind the attempt to scupper its share placing 11 days ago. Last week, it also emerged that the Serious Organised Crime Agency and HMRC are investigating the activities of former executives at JJB.
And in September, JJB said it had been granted immunity for turning whistleblower in assisting the Office of Fair Trading and Serious Fraud Office's investigations into alleged anti-competitive activities and fraud involving itself and its high street rival Sports Direct.
While these investigations will continue to engage its management team over the coming year, it is on the shop floor that Sir David and his team will want to make their mark under their "Serious about Sport" strategy, which will focus on selling sports equipment from tennis rackets to cricket bats.
Ahead of the football World Cup in South Africa, City analysts believe JJB has a fighting chance. Ms Wynne said, "There is a middle ground between the full price fashion-led approach of JD Sports and the price-led mass market offer of Sports Direct for a specialist."
But given its track record, few would bet against further controversies in the year ahead and JJB generating similar column inches to the England footballer David Beckham.
JJB and Sports Direct: Retail big-hitters
Sir David Jones
Sir David was widely regarded as a retailing legend before he was named as JJB's executive chairman on 2 January 2009. He is credited with saving the fashion chain Next from collapse after taking the helm there in 1988. But at JJB his judgement has been called into question, notably in accepting a £1.5m loan from Mike Ashley, the boss of rival Sports Direct, in 2007.
The founder of JJB Sports and owner of Wigan Athletic FC re-emerged this year to play a key role in the retailer's survival. In March, Mr Whelan paid £83.4m to acquire JJB's fitness clubs division. Mr Whelan has never liked Mr Ashley and, at the meeting when price- fixing activities were discussed in 2000, he famously told him: "There's a club in the North, son, and you're not part of it."
The owner of Newcastle United and founder of Sports Direct is never far from the news. Mr Ashley has shaken up the world of UK sports retailing over the past decade. He turned whistle-blower in the football shirts price-fixing inquiry that finished in 2004. But Sports Direct is now involved in investigations into alleged "cartel activities".
He was dismissed as chief executive of JJB in March after an ill-fated tenure at the retailer. But Mr Ronnie vehemently denies any wrongdoing over the transfer of a 27.5 per cent stake in JJB in 2008, which he bought from Dave Whelan for £190m in June 2007. He has been blamed for JJB's disastrous move into fashion and footwear.
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