The company offers its products under its own brands, which include Lonsdale, Voodoo Dolls, Hot Tuna, Slazenger, Antigua, Donnay, Title, Campri, Lillywhites, Nevica, Golddigga, No Fear, Carlton, Karrimor, Full Circle, Rock & Rags, Soviet, USA PRO, Muddyfox, Gelert, Everlast, SoulCal, Sondico, Fabric, Silver Fox, LA Gear, Firetrap, Crafted, and Kangol; and third-party brands. It offers a range of footwear, equipment, and sporting apparel through USC fascias and SPORTSDIRECT.com.

Key Statistics



Key Management: David Daly, Chairman; Mike Ashley, Chief Executive; andJon Kempster, Chief Financial Officer.
 
Top Investors

(Source: TR)

Financial Highlights (for H1 FY2019, £million)


(Source: Interim Report, Company Website)
 
Financial Commentary (H1 FY2019)

Group Revenue highlights

On year on year basis, H1 FY2019 reported group revenue from the UK sports retail segment was down by 0.2% to £1,140.2 million mainly due to the store closures; Premium lifestyle segment sales increased by 29.4% to £87.6 million largely due to the new Flannels stores; House of Fraser (HOF), a new segment revenue reported was  £70.1 million; European sports retail segment revenue dipped by 4.8% to £313.1 million, due to store closures; Rest of World (ROW) segment revenue was up by 28.1% to £100.7 million mainly due to the EMS/Bob’s stores in the US and the Wholesale & licensing  segment sales fell by 17.6% to £80.1 million mainly due to the decrease in the 3^rd party licenced activity in the United Kingdom.The company reported group sales of £1,791.8 million for the half year ending October 2018 as compared to £1,714.6 million in 2017 for the same period. There was a surge of 4.5% in group sales of the company due to an increase in the sales from premium lifestyle, ROW retail and introduced House of Fraser segment.

Gross Margins
In H1 FY19, reported gross margin from the UK sports retail segment was up by 1.2 per cent to 40.6%; Premium lifestyle segment margin increased by 2.4 per cent to 34.2%; House of Fraser segment margin was 28.7%; European Sports Retail segment margin surged by 2.9 per cent to 43.5%, and ROW retail segment margin climbed by 0.1 per cent to 39.9%.

EBITDA, Profit before tax (PBT), and EPS

The company’s underlying EBITDA (excluding HOF) was £180.3 million in H1 FY2019 as compared to £156.1 million in H1 FY2018. There was an increase of 15.5 per cent due to the flexibility of core UK sports retail segment and the continuing benefits of being able to offer the best products across the portfolio of fascias.In H1 FY2019, underlying EBITDA was down by 4.7 per cent to £148.8 million as compared to H1 FY 2018 underlying EBITDA.The company’s reported profit before tax climbed by 62.4 per cent to £74.4 million in H1 FY2019 as compared to £45.8 million in H1 FY2018, reflecting as a result of fair value impacts in the prior period.In H1 FY19, underlying profit before tax dipped by 26.8 per cent to £64.4 million as compared to £88.0 million reported last year.The company’s reported basic Earnings per share for H1 FY2019 was 8.7 pence which were 77.6 per cent more than H1 FY2018 reported EPS of 4.9 pence. Underlying basic EPS decreased by 35.4 per cent at 7.3p. The underlying free cash flow surged significantly by 49.4 per cent in the first half of the financial year 2019 to £69 million. Net debt increased to £505.5 million from £471.7 million.
 
Financial Ratios

(Source: TR)
 
Ratios Commentary
The company’s reported gross margin surged by 2.9 per cent to 41.5% in H1 FY19 against 38.6% reported last year in H1 FY18. EBITDA margin reported was 9.3 per cent in H1 FY 2019 which was in line as compared to the industry median. Net margin of 2.7 per cent in H1 FY19 declined marginally by 0.9 per cent when compared with the industry median. In H1 FY19, return on equity stood at 3.6 per cent which was remarkably lower than the industry median of 5.8 per cent. On the liquidity front, Sports Direct International plc liquidity position was slightly higher than the industry median. Current ratio surged in H1 FY 19 as compared to the previous six months data. On the leverage front, the debt-equity ratio was 0.52x which was significantly higher as compared to the industry median. It reflects the company is highly leveraged with additional use of debt funding.
 
Recent News
On 14^th November 2018, the company House of Fraser segment announced the closure of various stores like Metrocentre, Lakeside, Nottingham, and Norwich. On 30^th October 2018, Sports Direct International PLC announced the acquisition of Evans Cycle, a UK’s leading specialist bike shop. The acquisition deal was done for a consideration of 8 million pounds of which 2 million pounds was paid to fund Evans Cycle October payroll. The company welcomes the Evans staff to the SPD and look forward to build mutual relationship with the key suppliers of Evans Cycle. On 12^th October 2018, House of Fraser promised to create the 'Harrods of the North' -after announcing a deal of 95 million pounds to acquire the freehold of the iconic Frasers building in Glasgow.

Growth Perspective and Risks Assessments

In the second half of this year, the company will expect the sales growth of the retail sector in the United Kingdom to expand further with the opening of the new generation stores. The company expects the profits will increase by a single digit per cent in the current fiscal year end. The outcome of the UK referendum on leaving the European Union (Brexit) could have implications on economic conditions globally because of changes in policy direction, which might in turn influence the economic outlook for the eurozone.
 
Share Price Chart


Daily Chart as on 7th March 2019, before the market close (Source: Thomson Reuters)
 
Stock Performance
On 7^th March 2019, at the time of writing (before market close), Sports Direct shares were trading at GBX 264.8, down by 0.188 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 436.10/GBX 221.10. At the time of writing, the share was trading 39.17 per cent lower than its 52w High and 19.99 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 540,146.40; 30 days - 468,045.77 and 90 days - 668,997.53. The average traded volume for 5 days was up by 15.40 per cent as compared to 30 days average traded volume. Sports Direct International Plc share price decreased significantly by 4.22 per cent in the last three months (as at March 6, 2019), and in the last one year, the stock has delivered negative returns of 28.39 per cent. The company’s stock beta was 0.72, reflecting lower volatility as compared to the benchmark index. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 17.7x. The outstanding market capitalisation was around £1.43 billion.
 
Valuation Methodology

Method 1: Price/Earnings Multiple Approach (NTM) (NTM EPS (FY19E approx.))



To compare Sports Direct Holdings PLC with its peers, P/E value has been used. The peers are JD Sports Fashion PLC (NTM P/E was 15.42x), Puma SE (NTM P/E was 28.87x), WH Smith PLC (NTM P/E was 17.9x), Adidas AG (NTM P/E was 22.74x), and Grandvision NV (NTM P/E was 18.04x). The average of P/E (NTM) of the company’s peers was 20.5x.

Method 2: EV/EBITDA Multiple Approach (NTM)


To compare Sports Direct Holdings PLC with its peers, EV/EBITDA value has been used. The peers are Marks and Spencer Group PLC (NTM EV/EBITDA was 5.5x), Grandvision NV (NTM EV/EBITDA was 9.14x), Valora Holding AG (NTM EV/EBITDA was 8.81x) and Pets at Home Group PLC (NTM EV/EBITDA was 7.23x). The average of EV/EBITDA (NTM) of the company’s peers was 7.6x.

* All forecasted figures and peers have been taken from Thomson Reuters.
 
Conclusion

The company will have to remain watchful due to political and economic uncertainties across the world. The growing online business can help the company to improve its margins, but it will have a negative impact on the retail segment business due to a decrease in demand and higher operational costs burden. Based on strong fundamental performance and the valuation done using the above two methods, we have given a BUY recommendation at the closing price of GBX 265.3, as at March 06, 2019 with single-digit upside potential based on 20.5x NTM Price/Earnings on FY19E earnings per share and 7.6x NTM EV/EBITDA on FY19E EBITDA.

*The buy recommendation is valid for the current price as covered in the report as on (7th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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