Investment View: Why Ashley's on to a winner with his sporting life
There's a lesson for other retailers on how to motivate shop staff to draw in the customers
Our view Hold
Price 440p (+24p)
If only Christmas could come twice for Mike Ashley" was the reaction of one trader following the release of festive trading figures from Sports Direct.
To that one might be inclined to reply: like Mr Ashley needs it. There is no question that the retailer he founded unveiled what were, in the words of another City scribbler, "a stonking set of numbers".
The gloom that engulfs British high streets is noticeably absent from Sports Direct's shops as it said gross profit for the 13 weeks to 27 January, its third quarter for reporting purposes, grew 22.7 per cent to £244.8m. Total sales rose 21.1 per cent to £589.5m.
Sports Direct is targeting earnings of £270m (before interest, tax, depreciation and amortisation) for the full year, although its staff will take a chunk of that through an incentive scheme that has proven very effective in motivating them to sell the kit that chokes the stores – in previous years they've been able to double their earnings. Not that shareholders can have any complaint. There's actually a lesson in that for other retailers struggling to draw in customers – they'd do better concentrating on motivating shop floor staff than on designing yet more grandiose remuneration packages for executives who (largely) don't deserve them.
It's worth pointing out here that the other big winner over Christmas was the John Lewis Partnership, where the staff own the business and so also benefit when customers keep coming back.
There was a fuss last year among Sports Direct's external investors about a bonus share package for Mr Ashley, who is executive deputy chairman. It was (rightly) voted down. Mr Ashley's motivation should be the huge returns he will make from the company's stellar performance. He still owns most of it.
There's no reason for thinking Sports Direct can't go on from here. There is no big football tournament this year, a key sales driver, and sports retailers enjoyed a boost from the Olympics that won't be repeated. But there's no JJB Sports to worry about any more either, and Sports Direct has got its hands on some of its most direct competitor's choice sites. Meanwhile, the Europeans are rapidly falling for the formula, and the online business is a winner.
I last looked at the shares on 7 September when they stood at 331p and I advised holding them. That has proved a good call and the stock has put on nearly a third. The shares have recently slowed up a bit, and don't appear to be bargains at 16.8 times forecast full year earnings while yielding just 1 per cent.
That said, I still say hold on to the stock. In the current economic climate a discounter is going to win.
JD Sports Fashion sells many of the same brands you'll find in Sports Direct, but targets a rather different part of the market. If you absolutely have to have that £120-plus pair of Nikes you saw advertised the other day, it's at JD you'll probably find them.
As such, a bigger rival is probably the US-owned Foot Locker. In its trading update last month the part of the business focusing on that sector proved it could hold its head up even in the current tough climate. The UK and Ireland saw record Christmas trade, with sales in stores open at least a year up 3.2 per cent in the seven weeks to 5 January. That pulled the year's cumulative sales growth up to 2.4 per cent.
It's other parts of the business where JD has had problems, particularly Black's Leisure, which it bought out of administration in the hope the latter's managers could turn it around. They couldn't, and gobbling up the group has left the company with some painful indigestion. Improvements are, however, promised.
The City is certainly buying the story: the shares have been showing some real life in recent weeks.
Even so, however, they trade on a modest valuation of less than 8 times earnings for the year ending 31 January, 2014, while yielding 3.8 per cent, with plenty of cover to sustain that and more.
In the short term, you may find the shares pause for breath, but I'd be willing to back the company to deliver over the longer haul and so rate these shares as a buy. They still offer good value on the current valuation.
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