Sports Direct International Plc. (SPD)

More so for us UK investors.

I have digged through sports direct like any value investor would, I feel strong on the quantitive analysis ( id advise you dig through yourself and come to your own conclusion based on the 'four legs on a chair principle'). The shares have plunged 11-18% (due to what's written below) and is attractive intrinsically.

However my concern is qualitative, will the company be able to survive (5-10years) its recent negative media light due to improper employee management, lower profits due to Brexit and increased competition from JD Sports ? Will it be a repeat of JJB Sports ?

Any thoughts or anyone also looking at Sports Direct International Plc would greatly like to hear from you.

Jordonlee Smith.

Comments

  • Hi Jordonlee

    I too spent a decent length of time analysing SPD and mirror your confidence in the quantitative side of things. From the outset I was of the opinion that the plunge was mere public perception as opposed to any weakness is the business model. I have a more detailed summary of my reasoning noted back at home but a quick summary here would be;

    -Strong performance in last 5-10 years
    -Meeting the checklist criteria as laid out by Spiers/TIP (perhaps with a question mark around the integrity of its owner)
    -There was, until last week, a share buyback in place offering what I considered an extra safety net
    -Although JD Sports demand the comparison, I do think they are very different businesses, and believe they appeal to very different consumers. To me, the similarities start and end with the sale of "sportswear".
    -Number of owned brands allowing room for growth (as well as a number of niche websites owned and operated)

    I bought in at a good price and have missed the exit opportunity offering 20%. I believe this is a good business with the only concern being the transparency of the owner. Last weeks results weren't ideal but I could argue these mainly due to poor currency hedging management, an issue affecting most businesses and that the underlying model is still effective (top line growth evident).

    This was a quick response but I would be interested in hearing the opinions of others and engaging in some healthy conversation
  • edited December 2016
    Thank you very much for your reply, I thought I was the only one out there :)

    I certainly agree with you on the quantitative and value merit, SPD have shown superior performance over the past 5-10 years overall and are established as the UK largest sports retailer (and have moved online too, all the better). Especially with consistent ROE&ROIC with minimal debt and no dividend indicates the management are fairly effective at capital allocation (at face value at least).
    More attractive, is the fact the company is selling for nearly half its revenue and the net income is returning 13% on the current market price.

    The Owner is a bit of a character but I'm with you I certainly think there's strong evidence that shows the fundamentals of SPD are still strong and the decline in price is presenting nothing but opportunity.

    After researching the collapse of JJB Sports, I was reassured that nothing similar would happen to Sports Direct, as JJB had heavily loaded themselves with debt and had made numerous bad acquisitions.

    I'd love to hear more of your detailed analysis, in very intrigued in this prospect and talking to like minded people certainly helps.
  • Apologies for the delayed response JordonLee, I have been away and this passed me by.

    I have made a note to dig out my written thoughts and will post here when I get the chance. In the meantime, what are thoughts on the recent results and the potential sale of the Dunlop brand? Do you see any of this changing your opinions?

    Happy New Year to yourself and any members reading the thread.

    Z
  • No worries :) I hope you had a merry Christmas and a happy new year ! And yes that would be great whenever you have the time to post a little from your research findings, I've done quite a lot more myself also.
    The sale of Dunlop is a great question, I read the report they gave and it mentioned that they were focusing more on home brands rather then international expansion, it's hard to tell if this has come around because of the overall UK economy (with Brexit) or due to other factors internal to Sports Direct.
    The Dunlop brand is a big one to lose, however they will still have the linecne rights so not all revenue is lost. I think the best thing we can do is wait and see what occurs, if other international brands start to be sold off also then I think there's a bigger problem, however for now I believe focusing on the UK orientation of the business and regaining customer loyalty is a positive aspect.
    It would be great to know your thoughts on this too, I haven't read that much on it so far maybe you have some extra points ?

    All the best.
  • edited January 10
    I am new to investing after recently just watching the buffet videos and reading some books from peter lynch. I am from the UK and also looking at this stock at the moment so it would be really interesting to see the thoughts of other people looking at this company too.

    Going off what I have learned so far the fundamentals all look strong and the company appears to be undervalued. A few things that concern me are the high inventory in the assets. From my current understanding the drop in price is mainly down to some factory working conditions that were revealed and the weak pound resulting from the Brexit which the company had no hedging in place to protect against the drop in currency.

    However, more recent news suggests that the company wants to take the brand to a 'higher class' by focusing on larger names and abandoning some of the smaller sports brands that they own. This seems concerning to me as it sounds like they are diversifying away from what has made them successful. They also apparently plan to sell more of the brands that they own. What are your thoughts on this?
  • Hi there coolguydudeman, it's really good to have other like minded people also looking at this company and sharing thoughts.
    I completely agree with your concerns with Sports Direct and I have the same ones. I definitely think the selling off of brands could have a major implication on the future growth potential of the company especially as many of the brands are International which would squeeze Sports Direct more into a UK only focus (if other brands are also sold off along with Dunlop.)

    Although this isn't really a Apple-Apple comparison but if you look at what happened to Tesco and how one of their major headwinds came from entering into new markets (America) you could argue that diversifying across too many brands and too many countries could also hurt Sports Direct as they continued to grow over a longer period as opposed to focusing on core brands (that is only a thought, I doubt that it will be the case.) devils advocate.

    Without doubt the quantitive fundamentals are very attractive, however such qualitative concerns create hesitantation for me at the moment.
    How do you feel overall about the companies future prospects ?
  • Jordonlee, Coolguydudeman,

    (disclaimer...I do have an investment in SPD)

    looking over some scribbles I made back in October I shall give you a simplified version of my logic of entering a position in SPD;

    Pros;
    -SPD was trading at a near 52-week low following the labour conditions scandal and the news of £-$ hedging. - From this I do not read into any holes in their business strategy but rather the fall in SP is due to negative publicity.

    -Two valuations i carried out (one using a tool on the rule #1 website and the other on a crude excel-based model I have) put the value of the company less a 50% of safety into the region it was then trading at. (270-280p).

    -The company was (and has recently restarted) a share buyback scheme of shares under 300p - this I concluded was offering a blatant safety net up until the 300 mark.

    -As has been mentioned earlier in the thread, all the fundamentals and quantitative data looks good, consistent growth, shockingly low P/E when compared with JD Sports etc etc

    - I also looked at areas for growth, the number of different brands under the Sports Direct umbrella, potential for the flannels & Lillywhites stores.

    Negatives/Question Marks:
    -Buffett & Munger and are often cited as requiring "capable and honest management"...is Mike Ashley capable? Yes, to have grown his business to the current animal it is he must be more than competent. Honest? I'm not so sure, maybe i am swayed by the press but I dont think its an overstatement to say he doesnt have the best public image. How would a potential lack of honesty affect private shareholders?

    -Questions of the £ and the companys management of currency hedging. SPD have been hit by this so potentially will bemore vigilant that most companies going twice. "fool me once..."

    --Does this company have a strong MOAT? Sure SPD has its own Brands and trademarks but are these strong enough brands to create customer loyalty? Outside of this I identified supply chains and business processes & economies of scale providing the ability to keep out any potential low-cost competitors

    Now, what has changed since then? I missed the opportunity to exit at circa 325p which has highlighted my lack of opinion as to where I believe this company will go SP-wise, any thoughts? Since then, SPD had some average-to-poor results, MA has bought a jet and sold Dunlop whilst restarting the Share Buyback. I personally intend to sit down and reassess the situation but I am quietly content whilst SPD scoop up around 450,000 share everyday (for perspective, before the new year, they were buying back only tens of thousands per day)

    Thoughts?

    Also, its good to see some UK investors on here, perhaps we can create a new thread to look at other opportunities we are exploring. I would be keen to help each other in this process be it on here or through some other medium.

    Z

  • edited January 13
    Thank you for sharing your additional comments, it's great to learn others viewpoints. I have since done some more research myself which I will write up below. And yes it's great to see some familiar UK investors analysing UK based companies as value opportunities. I have recently started a blog where Ive accumulated many of investment ideas and philosophies if you're interested I'll send off with the webpage.

    To start off I definitely ageee with sound quality assessment. I certainly agree that I don't see any fundamental issues with the business strategy and that recent media light and of course Brexit are the culprits for recent quarters performance.

    SPD's cannibal activity (share buybacks) since 2012 attracted me also, I believe the management themselves are aware that the company is trading at a discount to its true intrinsic value and are choosing a good asset allocation. They have proven this before as they have a 10 year average ROIC of around 15% which is high for a retailer.

    The company is covered by its durable moats, especially the one you mentioned, supply chains from Singapore and South Korea aids the company to offer discounts on products that other competitors (JD sports) cannot offer. Of course being the number 1 sports retailer attracts competitors, however the scale capabilities of SPD have so far displayed greatsest amongst all other sports retailers despite of some consolidation of international brands.

    In terms of Mike Ashley, he definitely adds a sense of uncertainty however as you said he's built a defensively strong company and still owns majority shares so I believe his integrity is tied to the company and he wouldn't do anything major to ruin the reputation or brands of SPD.

    I also computed a discounted cash flow analysis and an earnings based analysis on my own excel sheet too, and the company certainly is undervalued on a quantitive base, only potential concern is how quickly the company can re-bounce however I'm certain it will remain a prominent figure in U.K. retail industry.

    Overall, with a 9.5% net income return on sales I would be happy to own this company even if the stock market closed tomorrow as Buffett would say.

    Regards, Jordonlee
    Blog page: valuesection.co.uk
    Hope to hear more and it's great to see UK value investors
  • Thanks Jordonlee, thoroughly enjoyed reading through your views. I think our opinions are mirrored on the majority of SPD's attributes.

    Thanks for the link to your site, I've had a quick browse today and was impressed with what I saw. I'll be sure to take a more in depth look at your valuations this evening.

    I would be eager in setting up some forum to discuss UK businesses, or even businesses in general but from the perspective of a UK based investment. I know this is one of the things Guy Spier encourages and believe he and Mohnish Pabrai frequently discuss businesses (whilst avoiding giving verdicts on whether to invest or not!). I can set up a thread here or could make contact through your site to set up an email chain if you prefer? Any other UK investors out there feel free to jump in also!

    Z
  • edited January 16
    Thank you very much for taking the time to read through some of my investment ideas, and you're absolutely right I think more UK investors should group together and form something similar to what Preston & Stig have done here or Monish & Guy as I believe many good UK companies are overlooked by Americans for the most part
    I definitely agree, if we and others set up something similar whether on my current site or a newly formed one it would be of enormous value to ourselves and other UK/international investors who want to get a foothold into business investing close to home. As many things that occur in America differ in the UK.
    If you're willing we can share contact details and discuss putting something together
  • Thank you very much for taking the time to read through some of my investment ideas, and you're absolutely right I think more UK investors should group together and form something similar to what Preston & Stig have done here or Monish & Guy as I believe many good UK companies are overlooked by Americans for the most part
Sign In or Register to comment.