Nick Bubb's verdict: Why Sports Direct missed its targets

So, what’s the story behind Sports Direct’s admission today that “planned acquisitions in full-year 2015 did not fully materialise”?

Buried in its year-end results statement was this rather startling admission: “As we enter FY16 it is clear, and also understood by the market, that planned acquisitions in FY15 did not fully materialise.

“Following its recent review the board now recommends to shareholders a revised FY16 adjusted underlying EBITDA target of £420m, rather than the existing target of £480m which is now considered to be unreasonably challenging. This compares to the underlying EBITDA of £383m achieved in FY15”.

Fortunately, the City had already worked out that 25% growth in EBITDA, which dictates its staff bonus scheme, this year would depend on Mike Ashley making another big and successful acquisition and that no such deal has materialised, so no great damage was caused to the share price, as expectations were already focused on more sedate growth of around 10% in the new year.

Mike Ashley insists that £420m EBITDA will not be “a walk in the park”, even though, in the core UK sports retail division, online sales growth and profitability continues to be surprisingly good, notwithstanding the £5 charge for click-and-collect orders.

Ventures with potential

Ironically, two of the more recent ventures should help the group get to its revised target this year, so the hard-working Sports Direct staff should not go empty handed.

The ‘premium lifestyle’ division is slowly turning around, as loss-making USC/Republic stores are weeded out and after the sizeable £20m EBITDA loss in its 2014 full year was cut to -£7.7m last year, a small EBITDA contribution is pencilled in for this year.

And although Sports Direct has declined to split out the contribution from its recently acquired business in Austria it is clear that it has taken longer than expected to turn around.

But inroads should be made into its bloated operating cost base this year and the key Mega Stores in Austria are being rebranded to the Lillywhites fascia, of all things, as the denizens of Innsbruck can testify.

And Mike Ashley revealed that the next big target market in Europe for Sports Direct is Spain.

Merger and acquisition target

But what was this elusive merger and acquisition target that it failed to land last year, knocking £60m off the target EBITDA for this year?

Well, House of Fraser was the simple answer and Mike Ashley was honest enough to admit to the City analysts today that having bought a 12% stake in the business he hadn’t expected a Chinese company to come along and buy the other 88%.

And what would Mike Ashley have done to House of Fraser? Well, he joked about launching a huge “Closing Down Sale” and renaming it “House of Ashley”, but his more serious point was that the business is too focused on growing own-label ranges for their high-gross margin and not enough on selling “proper” brands.

And the great man also turned his guns on Debenhams in the same way, claiming that the share price would be as high as 200p if they got the mix of brands and own-label right.

However, a bid for Debenhams has been publicly ruled out, so we will have to look elsewhere for the next M&A target in the pipeline: and the new finance director Matt Pearson sounded confident that a £100m to £150m cash deal would be landed this financial year.

Potential deals

Interestingly, Mike Ashley said that he could buy the Evans chain if he wanted to, although it is not known what the views of Sir Philip Green are on that matter.

More obviously, outdoor chains like Snow & Rock and Go Outdoors were mentioned as potential acquisitions, which will interest their private equity owners, but Mike Ashley made it clear that Sports Direct will not over-pay just to make a deal happen.

So, House of Fraser was the one that got away last year and it will be fascinating to look back in a year’s time at what sort of acquisition Mike Ashley makes next and whether that will help to firm up the full-year 2017 EBITDA target.