The market has greeted with enthusiasm today’s half-year results report from the FTSE 250’s Sports Direct International (LSE: SPD) and the shares are up around 28% as I write. The company will be known as Fraser Group from 17 December and I reckon something must be going well. Should I pile into the stock?
We could be seeing the beginning of a new era of growth and advancement for the share, which has been languishing since I last wrote about the firm two years ago. In some ways, it seems appropriate for the directors to mark the occasion by renaming the company.
Buying stressed brands and businesses
The choice of name arose because of the firm’s August 2018 acquisition of House of Fraser (HoF), which had entered administration that day. Sports Direct has a long track record of buying up stressed brands and retail businesses. And today’s report suggests that the turnaround at HoF appears to be going quite well.
Overall revenue increased by 14% compared to the equivalent period the year before and underlying earnings per share shot up by 111%. There was also good news regarding net debt, which plunged by almost 50% to just over £254m. The progress on borrowings arose because of “improved” underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and cash from the disposal of the Shirebrook distribution centre.
Non-executive Chairman David Daly said in the report the company is beginning to see the “green shoots” of recovery at HoF. He explained the strategy involves injecting new disciplines, experience and skills into the business to help the turnaround. Sports Direct aims to create a “superior” shopping experience for the consumer, led by the original Frasers concept. He predicts that “in the coming months and years,” Frasers will be a “vital and successful” part of the overall company.
The directors have been working on their Elevation Strategy for several years, which aims to improve the overall offering to customers across all channels, “including marketing, social media, product, digital and in-store.” It now seems clear that the directors are making HoF a big part of that, even to the extent of changing the company’s name.
Meanwhile, in a sign of the difficult trading environment in the retail sector, revenue in the first six months of the trading year to 27 October declined by 6.4% excluding acquisitions and currency movements. But I reckon we can get a good feel for the strength of the business in the figure for currency-adjusted underlying EBITDA excluding acquisitions, which came in just over 15% higher.
The company worked its magic on profits with an improved product mix, which has been “driving higher margins with less unit.” On top of that, better processes and procedures have led to driving efficiencies in operations.
However, Sports Direct doesn’t pay a dividend and the rapidly improving trajectory of profits makes it hard to put a forward-looking valuation multiple on the stock. I’m watching keenly because something big may be happening in the business.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019