September 11, 2013 12:30 pm

Premium sales help Sports Direct lift profit 23%

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Sports Direct©PA

Back in July 2007, when Mike Ashley was battling to convince a sceptical City of the merits of investing in Sports Direct, he promised that things would get better.

“We’ll get there,” he told the Financial Times after a disastrous five months as a public company, when it issued a profit warning, lost a chairman and rankled investors.

The nadir came at the end of 2008, when the shares, which floated at 300p in February 2007, slumped to 32p.

Mr Ashley’s faith has now been repaid, with a surge in trading, the shares at 729p and forthcoming elevation to the FTSE 100 index.

It is the latest milestone in the rehabilitation of Sports Direct – still controlled by the former squash coach who also owns Newcastle United football club – from a spurned stock to a respected retailer.

According to retail analyst Philip Dorgan, with the company’s entry into the index Mr Ashley is “almost joining the establishment”.

Sports Direct said sales rose 18.2 per cent year on year in the 13 weeks to July 28, to £613.3m. Gross profit rose 23.2 per cent to £260.1m. The first quarter of its financial year also compares with a period a year ago which included the boost from the Olympic games.

The consumer is “very comfortable with us as a brand, and what we offer in terms of the choice, availability and value. That is driving the performance,” said Dave Forsey, chief executive.

Mr Forsey, who has worked alongside Mr Ashley for more than 20 years, attributed the performance to several initiatives, including introducing more upmarket products into stores.

The company has also made a series of acquisitions over the past couple of years, including the USC and Cruise chains, upmarket retailer Flannels and, earlier this year, young fashion brand Republic.

Sales in the premium lifestyle division, which includes USC, Republic and Flannels, almost doubled to £57.1m, with gross profit up from £12.1m to £23.2m.

Sports Direct is continuing to target £310m of earnings before interest, tax, depreciation and amortisation this year. However, one analyst believes this is figure could prove “conservative”.

Analysts say Sports Direct is reaping the benefit of consolidating the UK sports goods market, for example acquiring 20 stores from failed rival JJB Sports almost a year ago.

“Basically, they have got no competition and they are doing very well,” said Mr Dorgan.

Another factor that analysts believe has contributed to Sports Direct’s success is its employee share incentive scheme, which saw 2,000 staff receive payouts this summer, with shop assistants on £20,000 a year netting more than £70,000.

However, the group has been criticised for its broader labour practices. It has come under fire for its use of zero hours contracts, which offer no guaranteed level of work. Unite, Britain’s biggest trade union, also has concerns about the transparency of the bonus scheme.

Mr Forsey declined to comment on the issue of zero hours contracts on Wednesday, and said Sports Direct was continuing with the bonus scheme.

“We are now in the third year of the second bonus scheme. That drives our performance as well. [The colleagues in the bonus scheme] are working hard to achieve those targets,” he said.

But some analysts are beginning to question whether the momentum can be sustained.

Matthew McEachran, analyst at N+1 Singer, said a “niggle” was the expansion into the fashion sector. “It’s a little bit of diversification too far perhaps from the core sports business where historically they have sat,” he said.

Much of the future potential is expected to come from the growth of online sales, and from expansion in continental Europe, after Sports Direct added stakes in an Austrian and a Baltic retailer to its growing international business.

“There is still more to go for in the UK,” said Mr McEachran. “In terms of laying down new stores, and having growth on the internet, the reality is a lot of it is going to come from Europe.”

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