Nick Bubb's Verdict: JD Sports - is Mike Ashley going to finish it off? 

Mike Ashley and Sports Direct are now masters of all they survey in terms of the mainstream sports market in the UK, after the demise of JJB and the rapid growth of Sports Direct Online. But JD Sports still dominates the fashion end of the market, although Mike has plans to change that. With his 12% stake in JD Sports he does, of course, have a vested interest in seeing the business do well, but he actually wants to see JD do badly.

If, despite his apparent annoyance at the time, Mike’s strategy was to allow JD to buy Blacks Leisure so that it would be dragged down by it, then so far at least things have worked out well for him.  

With today’s final results from JD Sports came the admission that the old Blacks Leisure business, now the outdoor retail division, lost nearly £15m last year, which, though not unexpected, was a big blot on the group’s overall performance (pre-exceptional PBT fell by 20% overall, from £76m to £60.5m).

When JD bought Blacks from the administrators at the beginning of last year for £20m they knew they were buying a loss-making business, but they didn’t know quite how bad a state the operation was in. What the Chairman of JD, Peter Cowgill, calls “10 years of gross mis-management at Blacks” left a fairly disastrous legacy and allowed several well-funded new competitors like Go Outdoors, Cotswold and Mountain Warehouse to grow rapidly to undermine Blacks’ market leadership. And after absorbing further trading losses and injecting more working capital and capex into the business, Blacks will turn out to have cost JD more like £50m-£60m in the end.   

And yet the outdoor sports market is huge, and the premium brands like North Face want Blacks to succeed and JD have the management skills to make a difference. And sometimes the weather can help as well. Blacks famously blamed the weather in the past for all sorts of trading disasters, but the cold spring we’ve suffered recently has been ideal for selling outerwear like jackets and business has been booming. The only reason why JD did not give a specific current trading update today for Blacks was, apparently, that it would have looked unbelievably good.

And the application of JD’s skills in visual merchandising have worked wonders on the store revamps at Blacks so far, with “meteoric” sales uplifts seen from the refits of heartland stores like Ambleside and Keswick, as well as in stores including Holborn and Mancheste. This encouraged JD to open a new Blacks store last Saturday in High Wycombe. JD need to watch the capex levels of these new look stores, but the plan is to do another 35 store refits at Blacks this year. And, having originally thought that the more mass-market and own-label focused Millets subsidiary would not be retained, JD now see a future for that too, as a separate chain.   

It remains to be seen how the weather will fare for the key camping season this summer, but at this stage JD are pretty confident that the losses at Blacks will be significantly reduced this year, perhaps to only around £5m, with break-even a target for next year. This will reassure most shareholders in JD, even if Mike Ashley may not be overly happy to see Blacks on the road to recovery. 

But JD’s performance in its new fashion division is much less convincing, with the Bank young branded fashion chain falling back into loss last year and current trading off to a bad start in the new-year. JD think they can turn Bank around, but they are ready to cut it next year if it fails to respond to treatment. Mike Ashley, of course, has aspirations of his own in this market, via the recent purchase of Republic, and fashion is going to be an increasingly important battleground for the 2 rivals.   

Fortunately, the core JD Sports business, although pretty mature, is still the king of trainers and it continues to produce very good returns. And JD have both the balance sheet strength and a supportive enough parent (in the form of 57% shareholder Pentland) to continue to make moves to grow overseas.

The worry remains, however, that JD is simply getting too complicated a group to run and that management is just getting too stretched. The CEO Barry Bown certainly has a lot on his plate, running 13 different fascias and well over 800 stores, whilst Peter Cowgill seems slightly too fond of deals and acquisitions. The history of UK retailing conglomerates like Sears is certainly not a happy one and JD will need to avoid making further mistakes if they are to avoid succumbing to Mike Ashley’s curse.