Analysis: What Republic will bring to Mike Ashley’s empire

When Sports Direct snapped up young fashion retailer Republic out of administration last week, the words of its formidable founder Mike Ashley must have been echoing through the ears of JD Sports Fashion chairman Peter Cowgill.

“I’ll finish off JJB first and then I’ll move on to JD,” Ashley said back in 2011, as JJB teetered close to the brink.

Two years later, JJB is no more. Sports Direct picked at its bones post-collapse, taking a small selection of stores and its headquarters, and now with Republic in its armoury it has its sights set on old foe JD Sports.

The acquisition is a clear sign that Sports Direct means business in the young fashion arena, an area where JD has traditionally been stronger, not just through its core fascia, but via its ownership of Bank and Scotts too.

Republic’s 116 stores will make a siezable addition to Sports Direct’s premium lifestyle division, which includes USC, luxury chain Cruise and nine-store branded fashion retailer Van Mildert, setting the stage for a young fashion battle between the two rivals.

“It’s an opportunity to build his [Ashley’s] presence in the fashion market and stop JD in its tracks,” says retail analyst Nick Bubb. “It’s a skirmish that is building up into quite a war. He’s egging Peter Cowgill into making more acquisitions - perhaps his plan is to make JD overstretch itself.”

Although the Republic acquisition may fuel the fire between Sports Direct and its competitor, the sports giant is pursuing what it views as a big opportunity in young fashion.

Sports Direct chief executive Dave Forsey says: “We have always said that premium lifestyle is an exciting growth potential for the group and Republic is a great brand and will fit well with the division.”

Sales at Sports Direct’s premium lifestyle division rocketed 42.4% to £46.7m in its last quarter to January 27, when gross profit leaped 35.1% to £20.4m.

Although the Republic acquisition, which is understood to have cost the sportswear retailer only about £10m, was opportunistic, Bubb thinks the wider push into young fashion is well timed. “There’s little room for him [Ashley] to move in the sports market now and if he can get something for near free, why not?” he says.

What next for Republic?

Forsey told Retail Week that Sports Direct will keep Republic as a standalone fascia.

Some baulked back in 2011 when Sports Direct, with its pile it high, sell ‘em cheap ethos, entered premium fashion through its acquisitions of USC and Cruise.

However, fears of DayGlo 70%-off signs plastered outside the stores have been unfounded and not only have sales risen, the new owner has maintained an offer and store environment tailored for its more upmarket customer.

Republic co-founder Carl Brewins, who stepped back from an executive role at the retailer in early 2012, believes the deal is a positive one for the young fashion group he started nearly 30 years ago. “It has a proven track record of buying brands and making them profitable. All the suppliers we [Republic] deal with are used by USC too. Everyone involved should be breathing a big sigh of relief,” he says.

Part of the reason why Sports Direct’s premium businesses have served their target customer well is that their existing management teams were retained and, along with the benefit of the sportswear giant’s operational expertise, were gifted a £20m investment to build the chains.

Republic’s management team has been volatile of late with co-founders Brewins and Tim Whitworth standing down from executive roles. New chief executive Paul Sweetenham has been in the post for only a year.

Forsey says: “We will be looking to bring some stability back to the business and will be reinvesting to ensure that the right people will be running the business going forward.”

Sports Direct has also retained USC founder Sir Tom Hunter as strategic adviser to its premium division.

Despite Sports Direct buying the Republic brand, Leeds head office and 116 stores, it is understood that some shops have been taken on license and further closures are expected. Forsey says it’s too early to say how many Republic stores it will operate.

“Part of the issue with Republic is that [former owner private equity firm TPG] over expanded. Inevitably Sports Direct will close stores,” says Bubb.

It is understood that rival bidders for Republic - Blue Inc and the Hargreaves family, owners of value fashion mammoth Matalan - were each aiming to create a 50-strong store business for the retailer, so Sports Direct may follow suit.

Brand designs

Republic’s own brands were no doubt a big draw for Sports Direct, which is well versed in snapping up labels to bring into its business.

Part of the sports giant’s success has been down to its strategy of acquiring leisure brands including Lonsdale, Slazenger, Dunlop and Everlast, which have allowed it to achieve better margins and the flexibility to license products globally with other retailers.

Over the past year it has followed a similar path in fashion, acquiring labels such as Firetrap and Full Circle, which it has not only wholesaled but brought into its core Sports Direct business. Republic’s own labels, including SoulCal, account for half of its sales and could potentially be sold in both USC and Sports Direct. Sports Direct’s plan for Republic will most likely involve ramping up the own-brand offer - not just of the Leeds-based retailer, but of the sports giant too. Firetrap is already stocked in Republic stores, for instance, and Sports Direct now has a wider retail presence to showcase any new brands that it will undoubtedly snap up in the future.

“He’s realised the value of brands. Sports Direct is developing international brands and selling in to the US. SoulCal is quite a strong brand. He will push the likes of it internationally and wholesale it,” says Cantor Fitzgerald analyst Freddie George.

Sweetenham had introduced higher-end brands into the retailer that failed to take off with its core customer. However, any move to ramp up own-brand will make Republic slightly more “downmarket” according to Bubb, which might sit well with Sports Direct’s core shoppers.

Bubb says moving it more downmarket would differentiate it from USC, which is more premium, and would see it fighting it out with JD-owned Bank, which has been suffering like-for-like declines lately, and Blue Inc for custom.

Sports Direct will also now be able to negotiate better deals with some of the more upmarket brands its premium division stocks because its buying power has been bolstered through the addition of the 116-store retailer to
its portfolio.

However, Sports Direct’s latest buy has not gone down well with everyone. “There are many shareholders that didn’t want him [Ashley] to get into the deal,” says George. “They see it as a distraction. They also don’t like him selling his shares on Monday then making this acquisition on Thursday, it’s very bad timing.”

Ashley sold £100m worth of shares last week, two days before acquiring Republic.

George says dissenters would prefer that the retailer concentrate on developing its online opportunity rather than forging a presence in the difficult young fashion sector.

Brewins agrees that the young fashion market is tough at the moment but points out its latest acquisition has given Sports Direct a considerable slice of the market. “The market will consolidate and if you were asking me who would be here at the end, I wouldn’t be betting against Mike Ashley,” he says.

Sports Direct’s joint house broker Oriel Securities analyst Jonathan Pritchard has faith in the retailer’s fledgling premium lifestyle business. “The numbers aren’t massive right now but it will not be difficult for it to become 5% to 10% of EBIT in three to five years time,” he says.

The deal also gives Ashley and company a greater insight into more mainstream fashion, which could be good experience for any future buys the acquisitive tycoon may have in his sights.

Bubb says: “It will not be the last deal he’ll do this year. It will be a good opportunity to master branded fashion which, if he is serious about buying House of Fraser, will be a good training ground.”

The Republic purchase might prove to be a game-changer for Sports Direct, and it could make the retailer the
reigning champion in the young fashion league.