Investment: JJB runs into trouble after acquiring rival

Sports retailer disappoints with warning on full-year profits
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The Independent Online
JJB SPORTS, the sports retailer, further disappointed investors yesterday when it issued a downbeat trading statement which included a warning on full-year profits. The main problem has been Sports Division, the rival sports chain acquired for pounds 290m in September.

In the seven weeks to 9 January, sales in the Sports Division stores fell by 16 per cent on a like-for-like basis compared with the same period last year. This was worse than expected and compared with an improved performance at the JJB stores, where same-store sales rose by 7.4 per cent in the same period.

Sports Division's problems are the same as those reported at the company's interim results in October, namely a shortage of new-season stock and the elimination of discount and clearance sales. The chain has also been up against tough comparisons last year, when it spent over pounds 1m on advertising.

JJB said it now expects group profits in the year to January to be towards the lower end of market expectations of pounds 40m-pounds 48m. The news disappointed analysts, who pointed out that the enlarged JJB Sports is now worth little more than the pounds 290m it paid for Sports Division in September. That deal was part-funded by a rights issue priced at 440p per share. Yesterday the share price gave up earlier gains to slide 38.5p to 249p.

JJB is suffering from the problems that have gripped the sports retail sector since last spring, when Sports Division was forced to pull its pounds 350m flotation. The boom in high-margin replica football kit has cooled, consumer spending has weakened and the sector is suffering from chronic over-capacity, with all the major players committed to extensive opening programmes.

John Richards, retail analyst at BT Alex.Brown, said: "Trading has pricked up in the pre-Christmas period but over-capacity is still a problem." JJB has scaled back its store opening programme but still opened 36 new stores, mostly in its larger superstore format, last year.

The group has also agreed terms on 28 new stores in the coming year. The company concedes that there are too many high street sports shops but believes its out-of-town superstores are a potential winner.

The stock issue at Sports Division will have been resolved in the next few months. The company is converting the superstores to the JJB format at the rate of two a week, with the plan to complete the process by the end of the year. However, the conversion of the high street Sports Division stores could take another three years.

In the replica market, JJB is discounting several club strips to boost sales. Replica kits still account for 14 per cent of group sales, down from 16 per cent a year ago.

David Whelan, executive chairman, said yesterday: "There is no doubt that retail trading conditions have been difficult. October was a particularly tough month and the Christmas trading period started more slowly than last year but accelerated right up to the last day before Christmas. Sales since then have been very buoyant, which encourages me to think that consumer confidence is slowly returning."

BT Alex.Brown feels JJB shares now have some potential, having fallen so far from their peak.

But SG Securities still rates the stock "underperform". The main worry is that, even if consumer spending does improve, the level of new store openings in the sports sector will continue to undermine earnings growth. The going could remain tough.