Analysis: JJB Sports in battle to avoid relegation

Struggling sportswear retailer JJB Sports once again looks as if it is staring into the abyss.

Chief executive Keith Jones’ decision to depart at the end of August leaves the retailer without a permanent boss. Beverley Williams is taking the role on an interim basis at a time when JJB’s sales remain in decline and the retailer is in desperate need of cash.

The fact that JJB is on its knees despite two CVAs and multiple refinancings begs the question whether the retailer can turn itself around or is its time up?

It seemed a different story just a few months ago. Then JJB was celebrating a new dawn when US giant Dick’s Sporting Goods came on board as a heavyweight backer, ploughing £20m into the business to proceed with store revamps.

Now, after the latest sales slide – which occurred during the Euro 2012 Championship to boot – the roll-out of the store refurbishments is under review as the retailer goes cap-in-hand for yet more investment.

“It’s very worrying,” says Conlumino lead consultant Matt Piner. “It’s a year since it took the CVA route and it still seems far from finding a stable footing. If the company can’t capitalise at a time when we have the Olympics and the Euros, when can it?”

Despite it being more than three years since its first CVA, JJB seems not to have been able to put its best foot forward. Jones always emphasised that JJB was the “authentic sportswear retailer”, a place where those serious about sport can pick up their gear.

However, there has often seemed to be a chasm between how consumers viewed the retailer and how it saw itself.

The problem appears to lie in the execution of strategy – notably availability. Piner says: “I can’t imagine a niche sportsman finding what they need there.”

Sporting rivalries

In contrast, arch-rival Sports Direct continues to score on the retail field. “Mike Ashley is fantastic from the operations and systems side, everything is in stock and on the floor. However, at JJB, often stuff is out of stock,” says Piner.

Seymour Pierce analyst Freddie George agrees: “JJB said that it was going to be the specialist but did it actually do it? It doesn’t even seem to do half sizes [in trainers].”

While the economic climate remains no friend to any retailer attempting a turnaround, George nevertheless believes JJB has missed an opportunity.

“In leisure people are still aspirational,” he says. “In cycling, for example, shoppers are generally middle-aged and affluent and will spend lots of money on their bike and gear.”

But it is Sports Direct that remains the biggest thorn in JJB’s side. JJB’s bigger, cheaper rival continues to thrive at its expense. Ashley’s empire, best known for its value credentials, has encroached into specialist categories, making it difficult to distinguish between Sports Direct and its rival.

“I don’t think anyone would want to take on Mike Ashley right now,” says George. “Ranges are getting stronger and stronger. Sports Direct is moving into specialist areas with [running department] SheRunsHeRuns, and JD Sports has got the fashion end of the market sewn up. Where can JJB go from here?”

Sports Direct has also vowed to become the leader in niche but less profitable sporting fields such as boxing, cricket and hockey, which Piner believes gives it authority as a genuine sports destination.

“JJB doesn’t have that authority,” Piner says. “It seems to dabble in sports and dabble in fashion but it is known neither for its quality nor its cheapness.”

Sports Direct, which achieved a 25% leap in pre-tax profits in the year to April 29, has been widening its offer using its much-promoted website, heightening the threat to JJB.

“Ashley has been telling everyone how bricks and clicks is transforming business. Sports Direct’s online offer is phenomenal,” says Singer Capital Markets analyst Mark Photiades.

And there is no let up on price. “Sports Direct watches JJB closely and is quick to match any promotions. It’s not making it an easier place for it to stage a turnaround,” says Piner.

Shareholder support

So far, JJB appears to have extremely understanding shareholders. Its big-hitting investors, which along with Dick’s includes fund manager Invesco (with a 47% share), Harris Associates (29.5%) and billionaire entrepreneur Bill Gates (5%), have backed three fundraisings already.

Yet the retailer is still haemorrhaging cash and expected to make losses in the region of £50m this year.

JJB made its latest cash call last month when it revealed that net debt had risen to £17.7m against existing banking facilities of £25m. Like-for-likes slumped to 8.7% in the 24 weeks to July 15 – a period that included the Euro 2012 Championship.

However, George questions whether backers should keep on propping JJB up. He maintains: “You can’t throw good money after bad. It’s had lots of money ploughed in but it’s not come up with a clear strategy or, if there is, I clearly don’t understand it.”

Dick’s recent backing has also raised questions about its intentions and the appointment of US sportswear veteran Bob Corliss as chairman-in-waiting stoked speculation that an American takeover may be on the cards.

Restructuring specialist Corliss has been involved in two bankruptcy situations in the past five years. His involvement at JJB has made some wonder whether more restructuring is on the cards there.

“I imagine Dick’s will eventually buy JJB, but it will probably fall into administration first,” says George.

However, George questions whether the US giant, which has more than 400 stores in North America, is certain of what it is doing in the UK market.

He says: “It reminds me of Best Buy taking on Dixons. It misunderstood the UK market and was forced to retreat. Perhaps Dick’s thinks that Sports Direct is just a discounter.”

George believes the US retailer will try to make JJB work though, and believes its plan will involve cost-cutting and downsizing stores.

JJB’s store portfolio is already much diminished. Just five years ago it had more than 400 shops. Now it has fewer than 200. That compares with 470-store Sports Direct.

Piner insists there is still a place in the UK market for a specialist sports retailer, but believes that JJB in its current state is not filling it. He says: “At the moment it’s a self-fulfilling circle. Its falling sales mean it will struggle to keep suppliers on board and stock on the shelf, which will in turn affect footfall.”

With continued backing, or perhaps under new ownership, and with strong global supply relationships, JJB might eventually become the authentic sports retailer it has long aspired to be.

However, at present it is Sports Direct that looks well positioned to continue to dominate the field.