This post is a quantitive and qualitative analysis of Sports Direct International Plc. Another held position.

Sports Direct should be viewed as a long-term investment, compounding earnings into the future.

1. Vigilant Leadership

Management at sports direct has and continues to display high level management capabilities, whilst consistently improving the total shareholder returns, despite a none existing dividends payment.

Quantitively: 

  • Current: Debt/Equity = 0.24
  • 10 Year Ave: Debt/Equity = 0.20
  • Current: Quick Ratio = 2.4
  • 10 Year Ave: Quick Ratio = 1.26
  • Current: Return on equity = 20%
  • 10 Year Ave: Return on equity = 23.7%
  • Current: Interest coverage = 15.7
  • 10 Year Ave: Free Cash Flow = £48.2 (GBP Mill)

On a quantitive basis, the management at Sports Direct has consistently displayed they have the necessary competencies to avoid dangers of excess debt levels, as well as maintaining a high return on equity on a consistent basis. Despite, of recent troubling times with the Brexit ruling. Further, implying good asset allocation abilities from a face value.

Qualitatively: 

Management salary and remuneration

  • Management rewarded based on long-term year-on-year performance.
  • Mike Ashly- Executive chairman and founder since 1982 holds around 55% of shares outstanding.
  • Directors must hold a minimum of 50,000 shares whilst being employed at sports direct.

Mike Ashly the majority shareholder does have a character, which has been displayed in recent media light, nonetheless I do not believe his borderline aggressive actions in the past can take away Sports Direct’s amazing performance over the past 5-10 years, along with the boost past (now liquidated) JJB sports – previous competitor.

2. Long-Term Prospects

Business category:

Category 3 – Businesses with uncertainty, but not necessarily risky.

Medium growth: (7-9% P.a)

Operations:

Sports Direct is the UK’s largest sports retailer and operates a diversified portfolio of sports, fitness, fashion, lifestyle fascias and many well-known brands.

Sports Direct operates its major business segments through Sports retail, Premium lifestyle and brands.

Suppliers:

  • 40% of the current suppliers have been with Sports Direct for 10 years + providing long lasting relations.
  • The company has two leading suppliers in Singapore and South Korea, which enables them to vastly reduce costs of goods sold, thus providing more sustainable margins despite of the industry contraction.

Major Competition:

  • JD Sports, Footlocker, Snow&Rock Sports

Rank in industry:

Sports Direct is No. 1 in UK sports retail.

Technological Proof:

Sports Direct can use technological advancements to their advantage. As noted in recent annual reports, the company aims to invest further into technological advancements including mobile applications in order to get closer interactions with customers and to further differentiate from their nearest competitors.

Weaknesses:

  • Sports industry is becoming highly competitive, which is slowing down growth.
  • Sports Direct operates under smaller margins today, keeping the pressure to maintain profitability.
  • Recent quarter (Q4 2016) decline in sales due to brexit fears and negative media certainly hasn’t helped the company, however this does provide a great buying opportunity providing Sports Direct meets all of our filters.
  • Transparency of the majority owner Mike Ashly is not 100% and potentially could provide future difficulties.

3. Stable and Understandable business economics

Stability

img_0128 img_0127img_0126  img_0129

Source: http://buffettsbooks.com/howtoinvestinstocks/course2/stocks/stock-stability.html#sthash.gbp7nnWq.dpbs

Understandable Business economics

Barriers to entry:

  • 10 Year Ave: Return on Invested capital = 15%. Illustrating strong and consistent asset allocation by the management, thus increasing the difficulty for new competitors.
  • This is especially crucial, as Sports Direct does not pay a dividend payment, henceforth the total shareholder return is heavily down to the managements ability to consistently provide above average returns on invested capital.
  • UK’s No.1 sports retailer since 2007/08 – providing excellent defence and wisdom of the industry.
  • Total industry Revenue = £8 Billion. SPD Total Revenue (TTM) = £3 Billion respectively. Hence, Sports Direct maintains (relatively) a 38% share in the total revenue of the industry.
  • I believe it would be very difficult to hurt the business with £1Billion due to such barriers to entry a long with SPD competitive moats (discussed further down).

Demand:

  • Demand for sporting goods and participation in activities have generally been volatile and subject to international sporting events.
  • Such volatility has lead to many of the sporting retailers being forced to lower prices – explains why Sports Direct’s margins have been thinner in recent years.

Industry:

  • The Sports retail industry currently is in its maturity stage of its life cycle in the UK. Slightly lagging current UK GDP.
  • Annual Industry growth between 2011-16 = 2.5% respectively.

Competitive Advantages: (MOATS!!!)

  1. UK’s No. 1 sports retailer with over 470 stores across the UK
  2. Trusted brands for over a decade, with room for growth and leverage
  3. Aggressive in acquiring new brands across Europe (growth potential)
  4. Savvy pricing strategy
  5. Connected to large brands (Inc. Adidas, Nike Reebok and others)
  6. Cannibal Activity since 2012 (share buybacks)

4. Attractive Price to Valuation

From computing three discounted cash flow model analysis on the future cash flows of Sports Direct and discounting them back to today’s present value using a 8% discount rate to be Intrinsically valued between £3 and £5 per share. Which is £1.8 Billion and £3 Billion for the entire company.

In addition, some valuation metrics were also considered in this valuation. These are not limited.

* Based on a current market value of £1.67 Billion for the entire company.

  • P/E = 7 and P/TBV = 1.57
  • P/S = 0.5
  • Earnings/Price = 13% Net earnings return
  • Acquirer’s multiple (r) (EV/Operating earnings) = 9.5 = 10.5% return

5. Summary

Sports Direct certainly is undervalued on a quantitive merit and the entire company is selling for half its current revenue. In addition, Sports Direct is dispensing a 13% return of net income back to shareholders (according to me this is sufficient enough to cover the none existing dividend payments). Being the UK’s leading sports retailer, with growth potential across Europe and the States, the companies runway far extends its nearest competitors.

Additional comments on Sports Direct:

img_0125Source: https://forums.theinvestorspodcast.com/discussion/4564/sports-direct-international-plc-spd

Thank you for reading, hope you gained some insights. All comments and discussions are welcome  🙂

Jordonlee W. Smith

 

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