James Moore: Stick with Sports Direct – there's more to come
Investment View: Not only executives but floor staff in the shops can pick up fat bonuses if the company hits targets
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Friday 07 September 2012
Our view Hold
Price 330p (+6p)
Sports Direct's ads shamelessly big up the company with a mock football crowd cheering "Sports Direct.com Britain's number one."
Annoying, for sure, but it may be right. The company has posted a 25 per cent surge in sales, successfully capitalising on Team GB's heroics in the Olympics. Oh, there was also a European football championship that helped a bit, even thought the Premiership's spoiled millionaires did what they always do: crash out on penalties.
Trouble is Sport's Direct's directors seem to think that the company's controlling shareholder and executive vice chairman, Mike Ashley should be handed a gold medal for taking a stroll.
Shareholders said no (Mr Ashely wasn't allowed to vote). And the reaction of David Singleton, chairman of the Sports Direct remuneration committee? The company is "very disappointed" by their decision. It will propose a different share scheme at a future meeting.
Some advice for him, because his brain didn't appear to be in gear when he said that: Listen. To. Your. Shareholders. All of them, not just Mr Ashley. It is your job to look after their interests and incentive schemes with weak performance criteria do not serve their interests. You shouldn't need me to tell you that.
Now let's be fair to Mr Ashley and his company (but not to Mr Singleton because he doesn't deserve it). By contrast to many of its rivals, Sports Direct shares the love.
It's not just the executives who profit from other people's hard work. The floor staff in the shops can pick up fat bonuses if the company hits targets. Thousands of them are sitting on shares worth more than £50,000. They are go-to-work motivated and loath to leave the company. No wonder chief executive David Forsey has described it as "a game changer".
It's hard to argue with the numbers, either. Sports Direct is doing stunningly well, and is providing quite an example to rivals who sit and moan about the "challenging climate" economically.
But that doesn't make handing Mr Ashley, who doesn't take a salary, a sizeable bung based on deficient performance criteria the right thing to do. Like everybody else in the business, he should be challenged if he wants other shareholders to cough up for him. Making it too easy for executives to earn millions is damaging for investors and Britain's economy. Note to Mr Singleton: why not show the City you can lead the way on good, corporate governance as well as on performance? Just a thought, given that in the past the company has made some questionable decisions.
On 1 June I argued that Sports Direct would be one of the winners of the summer of sport and recommended a buy. The argument proved sound. The buy advice was issued with the shares below 290p. They are now testing the 330p level and since then biggest rival JJB has all but given up the ghost. It's up for sale with the money set to go to creditors rather than shareholders.
Sports Direct's shares now sit on nearly 16 times earnings for the year ending 30 April 2013, yielding just 1 per cent, although you don't buy a growth stock like this for yield. Next year is a down one for big sporting events and the company could struggle to replicate its performance.
But it's fast-growing European business, and burgeoning online operations suggest that there is more to come. I wouldn't blame anyone for taking profits, but long term you should hold these shares. Even with the company's eccentricities and people like Mr Singleton chairing the RemCo there looks to be more to come. Hold.
We also highlighted JD Sports Fashion, which is less of a discounter and positioned more as a purveyor of, well, urban clothing with a sports theme, although they'll happily sell you a football if you want. We said keep buying with the shares at about 680p, but they've rather drifted since. The interim results are due in just over a week's time and the company will do well to match up to Sports Direct. Still, these shares are still absurdly cheap at seven times forecast earnings for the year to 31 January, yielding 4 per cent. Stick with them.
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