Financial Analysis and Management: Sports Direct PLC

free essaySports Direct PLC is a UK based firm operating in the retail industry with specialty in sportswear products. Founded in 1982, Sports Direct is currently the leading sportswear retailer in the UK in terms of sales volume and revenue. It also owns hundreds of stores spanning across Europe. It also vends its products on its online store. Sports Direct operates through three segments: Sports Retailing, Premium Lifestyle, and Brands. The firm sells several products under its own brands but also stocks reputed third party brands. Sports Direct’s financial objective is to maximize shareholders wealth and stand out as the leading sporting company in the world, a goal it continues to pursue through increasing its presence in the UK and other European countries. In the face of intensifying competition in the sportswear retail segment, Sports Direct has adopted strategies to maintain its position as a market leader. These strategies include discounted pricing strategies and acquisition of competitors. An in-depth analysis of the firm’s ratios indicates that it has a good financial position. Analysis of profitability ratios shows rising profits. Efficiency ratios show that the firm has effective working capital management approaches. The firm is also able to meet its short-term and long-term financial obligations as shown by analysis of liquidity ratios and solvency ratios respectively. The firm’s high EPS shows high prospects of share growth. The overall ratio analysis shows that the firm’s ratios are above peers’ averages and often higher than those of its closest rivals are.

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Sports Direct is the leader in the UK’s sports retailing industry measured by revenue and operating profit. Founded in 1982, it is headquartered in Shirebrook in the UK (Financial Times, 2016). The company owns a substantial number of world-famous sports and leisure clothing, footwear, equipment and accessories (Sports Direct, 2015). It has three segments of operations that include Sports Retailing, Premium Lifestyle, and Brands. The company also vends its products through its online store – Sportsdirect.com (Yahoo Finance, 2016). Part of its business comprises the wholesale distribution of the named products under its owned or licensed brands,   brand management and licensing activities. Some of the company’s owned brands include Dunlop, Karrimor, Everlast, Lonsdale, and Carlton. Third party’s brands include Nike, Adidas, and Reebok (Sports Direct, 2015). As of its 2015 financial year, Sports Direct operated more than 661 stores in the UK and globally (Yahoo Finance, 2016). The purpose of this report is to analyze Sports Direct based on its financial statements. The decision to settle on Sports Direct as the company of analysis was based on the several criteria. First, Sports Direct is the UK company listed on the London Stock Exchange, thus, its financial reports are readily available and credible to meet the threshold for analysis. Second, as the leading company in the UK’s Sportswear market, analysis of Sports Direct provides a snapshot of the entire sportswear market in the UK. Sports Direct’s financial objective is to maximize shareholders wealth and stand out as the leading sporting company in the world.
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Financial Ratios

Profitability Ratios

Ratio Formula 2015 2014
Gross Profit Margin Gross Margin/Revenue 1,240,812/ 2,832,560= 44.26% 1,154,922/ 2,705,958=42.68%
Profit Margin Ratio Net Income/Revenue 241,353/2,832,560 = 8.52% 179,613/  2,705,958 = 6.64%
Return on Assets Net Income/ Total Assets 241,353/1,773,683 =13.60% 179,613/ 1,700,739 =10.56%
Return on Equity Net Income/ Shareholder’s Equity 241,353/1,161,551 = 20.78% 179,613/817,554=

22.0%

Liquidity Ratios

Ratio Formula 2015 2014
Current Ratio Current Assets/ Current Liabilities 878,297/382621= 2.3 843,872/799,245= 1.06
Quick Ratio Current Assets – Inventories/ Current Liabilities (878297-517054)/382621 =0.94 (843,872-565,479)/799,245

=0.35

Solvency Ratios

Ratio Formula 2015 2014
Debt to Equity Total liabilities/Total Equity 612,132/ 1,161,551= 0.53 883,185 /817,554= 1.08
Equity Ratio Total Equity/Total Assets 1,161,551/1,773,683= 0.65 817,554/1,700,739=0.48
Debt Ratio Total Liabilities/Total Assets 612,132/1,773,683=0.34 612,132/1,700,739= 0.36

Efficiency Ratios

Ratio Formula 2015 2014
Assets Turnover Revenue/ Total Assets 2,832,560/1,773,683 = 1.60 2,705,958/1,773,683 =1.53
Inventory Turnover Cost of Goods Sold/Average Inventory 1,591,748/(517,054+565,479)/2 = 3.06 1,551,036/(565,479+446,962)/2 = 3
Days’ Sales Inventory Ending (Inventory/Cost of Goods Sold)* 365 (517,054/1,591,748)* 365= 119 (565,479/1,551,036)*365 =133

Market Prospect Ratios

Ratio Formula 2015 2014
Earnings Per Share Net Income- Preferred Dividend/Common Shares Outstanding(weighted) 240,397/592,294

=40.6

180,245/585,514

= 30.8

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  • Profitability Ratios

Profitability ratios measure the capacity of a firm to generate profit from its operations.  The ratios seek to determine the returns of a firm from its investments in inventory and other types of assets (Arnold, 2007). Profitability ratios are particularly important to investors and creditors. They can judge a firm’s returns by examining the ratios in light of the relative level of a firm’s resources and assets (Arnold, 2007). The ratios selected in for analysis include gross margin, profit margin, return on assets, and return on equity.

Gross margin compares the gross profit of a firm to its net sales. It measures how profitably a firm sells its inventory since it shows the percentage of the sales revenue available for use in meeting operating expenses after deducting the cost of sales (Besley & Brigham, 2006). Profit margin ratio is a measure of the net profit generated for each dollar of sales. It indicates the percentage of sales that remain after paying all expenses (Besley & Brigham, 2006). Return on Assets (ROA) ratio is a measure of the profit generated per every dollar invested in total assets. Return on equity (ROE) ratio shows the capacity of a firm to generate profits from shareholders’ funds (Besley & Brigham, 2006).

  • Liquidity Ratios

Liquidity ratios assess the capacity of a firm to meet its short-term financial obligations as they become due. Current ratio indicates the liquidity of a firm as measured by comparing total current assets with total current liabilities. The quick ratio is current ratio adjusted for the relatively less liquid inventories (Besley & Brigham, 2006).

  • Solvency Ratios

Solvency ratios measure the ability of a firm to meet its long-term financial obligations to creditors and debt holders. Better solvency ratios show the financial soundness and creditworthiness of a firm. Solvency ratios selected for Sports Direct include debt to equity ratio, equity ratio, and debt ratios (Besley & Brigham, 2006).

  • Efficiency Ratios

Ratios selected include assets turnover, inventory turnover, and days’ sales inventory.  Assets turnover measures the efficiency of a firm in using its assets to generate profit. Days’ sales inventory examines the duration a firm takes to collect its trade receivables. Inventory turnover looks into the duration it takes to convert inventory into sales (Besley & Brigham, 2006).

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  • Market Prospect Ratios

These ratios are used to compare listed firm’s stock prices with other financial measures such as earning and rates of dividends. They are useful in analyzing share price trends and help understand a share’s current and future market value (Arnold, 2007). Market prospect ratio selected in this case is EPS, in view that Sports Direct did not pay any dividend in the two financial years under analysis. EPS is a measure of the amount of net profit that can accrue to one outstanding share of common stock if all the earnings were distributed as dividends (Arnold, 2007).

Examination of the Performance of Sports Direct PLC

Sports Direct PLC operates in the sportswear segment of the retail industry. The segment has shown consistent growth over the recent years. It grew by 9.5% in 2014 (Russell, 2015). In the same year, sales volume increased by 10.7% to 28.2 million units, while the average unit price went up by 2.5% to £18.64 (Russell, 2015). The key drivers of the upward trajectory  include the growth in demand for women’s sportswear, increased number of designers, a collaboration of brands with celebrity and continuing crossover between fashion and sportswear. The UK’s sportswear retail segment has been projected to grow by 35.6% from 2015 through 2019 to reach £8.65 billion, driven by the yearly growth rate of between 7.7% and 8.1% (Russell, 2015).

Sports Direct faces competition from firms specializing in sportswear and also those in the general retail industry. Its closest rival is JD Sports Fashion PLC (Financial Times, 2016). The escalating competition continues to affect Sports Direct adversely through placing pressure on its pricing strategy and profitability. As a counter measure, Sports Direct has devised a discount pricing policy that enables it to mitigate the risk of the high competition in the industry.  It also focuses on acquiring competitors to retain its discounted pricing strategies while avoiding price increases from third party owned brands (Wardhaugh, 2014). In the 2015 financial year, it acquired several firms in the retail industry including 25 LA Fitness gyms and Gul Watersports. Pursuant to its objective to increase its number of stores in Europe, Sports Direct opened 39 stores in the UK and 16 more stores in other European countries (Sports Direct, 2015).

The ratio analysis above largely shows that Sports Direct is increasingly gaining a favorable financial position. The firm’s profitability has grown over the two financial years, (2014 and 2015) as depicted by the increase in gross margin from 42.68% to 44.26%, profit margin from 6.64% to 8.52%, and return on assets from 10.56% to 13.60 %. Sports Direct’s profit margin is among the highest in the general retail industry. The ROA is also among the highest in the industry. The ROE deteriorated from 2014 to 2015 (20.78% to 22%) due to increase in the total equity in 2015 but remains above the industry average (Financial Times, 2016).

Analysis of liquidity ratios shows that the firm is sufficiently liquid and is able to meet its short-term financial obligations when they become due (Arnold, 2007). Sports Direct’s current ratio increased from 1.06 in 2014 to 2.3 in 2015. The quick ratio increased from 0.35 to 0.95. The increase in liquidity as measured by the two ratios is attributed to decrease in current liabilities from 2014 to 2015, and decrease in ending inventory.

Analysis of the firm’s solvency indicates that the firm is able to meet its long-term financial obligations. Sports Direct’s debt to equity ratio fell from 1.08 in 2014 to 0.53 in 2015. Debt ratio fell from 0.36 to 0.34 while equity ratio rose from 0.48 to 0.65. The decrease in debt to equity ratio and debt ratio is due to increase in total equity and total assets respectively relative to total liabilities in the financial year 2015. The decrease in these ratios shows that Direct Sports is becoming a less leveraged firm, thus, reduced bankruptcy risk (Bhat & Rau 2008). The increase in equity ratio shows that more firm’s assets were financed by shareholders in 2015 than in 2014. The high equity ratio shows that investors have confidence in the firm and are willing to invest in the firm (Bhat & Rau 2008).

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Analysis of Sports Direct’s efficiency ratios shows the firm’s ability to implement effective capital management strategies. The increase in asset turnover ratio from 1.53 in 2014 to 1.60 in 2015 shows that the firm is becoming more efficient in utilizing its assets to generate sales (Arnold, 2007). Inventory turnover ratio increased from 3 in 2014 to 3.06 in 2015. The increase means that the firm turned (sold) its inventory more frequently in 2015 than in 2014, which is indication of efficiency in management of inventory levels (Arnold, 2007). Direct Sports’ inventory turnover is the lowest in the general retail industry (Financial Times, 2016). The days’ sale of inventory decreased from 133 days to 119 days, once again implying that the firm was able to sell (turn) its inventory faster in 2015 than in 2014 (Arnold, 2007). Low days’ sales of inventory are in the best interest of investors.

Direct Sports’ basic earnings per share increased from 30.8 pence/share in 2014 to 40.6 pence/share in 2015. The high EPS indicates that the firm is more profitable and has more incomes to distribute to common stockholders. Indeed, Sports Direct’s profit increased substantially in 2015 (241,353 from 179,613 in 2014). Its basic EPS for 2015 was one of the highest in the general retail industry. However, Sports Direct did not issue any dividends in the two financial years.

Conclusion and Recommendations

Ratio analysis shows that Sports Direct is in a stable financial condition, and investors should invest in the firm. From the analysis, it is observed that the firm‘s margins are increasing as a result of the increase in sales and reduction in expenses. This trajectory is attributed to the firm’s move to expand its presence in European countries through acquisitions of rival firms, constructing new stores, as well as leveraging online sales. The liquidity and solvency position of the firm are above the industry average though slightly below some of its closest rivals in some instances. In addition, the firm has excellent working capital management strategies. The market prospects of its share are also favorable to investors. Despite the failure to issue dividends for two consecutive financial years, investors can expect to make immense capital gains as the firm’s share has been on constant rise over the years. These conclusions are in consistency with analysts’ forecasts that the firm’s share price will outperform the market in 2016 as its revenue and asset base continue to grow(Financial Times, 2016). As an investor, I would buy Sports Direct’s shares and sell them for capital gains after the appreciation that is expected to occur as per the analysis and forecasts. Apparently, the company’s objective to maintain its position as the leader in the sports retail industry in the UK and gain momentum in its expansion in Europe largely depends on implementation of effective growth and expansion strategies. These will be achieved through diversification of its products offerings, strategic investments, and acquisition not only in the UK but also in other European countries (Bajaj, Tuli, & Srivastava, 2014). There may also be a need for the firm to issue dividends in its next financial year. The rationale is that some investors are interested in dividend income as opposed to capital gains (Bhat & Rau, 2008).