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Competition Drives Down JJB Profit
APRIL 20, 2006 --
(9:10) The UK's second largest sporting goods chain had a dismal FY. Preliminary results indicate revenues fell 3.6% to £745.2 million. The chain's operating profit plunged 44.7% to £34.3 million. EPS were 13.10p, down 33.0%.
Comp-sales revenue (on a 52 week comparative basis) decreased 4.3%. Trading conditions have continued to be very competitive. The replica kit comparisons achieved during Euro 2004 are being difficult to match. A more competitive pricing policy has been pursued since October 2005 with a consequent effect upon gross margins.
Revenues of the Leisure Division increased 42.2% to £89.2 million. A more significant benefit at operating profit level will be achieved during the current year as last year’s openings make a full year contribution.
JJB has increased the number of its combined health club/superstores by 11 to 32.
Despite the distortion of a late Easter in 2006, results are in line with expectations, with an increase in total revenue for the 11 weeks to April 16 of 5.8% (when compared to the same period last year), including a comp increase of 2.6%, but with a fall in gross margin to 46.1% from 49.0%.
Roger Lane-Smith, non-executive COB, said: “Although not unexpected, the fall in the full year profits is disappointing. As well as a generally difficult retail climate, the sports sub-sector is also going through a fundamental change with competitive pressures making trading conditions extremely challenging. To offset this, we have adopted a more aggressive stance on pricing with a resultant pressure on margin and have undertaken other sales initiatives to address these competitive issues.
"However, I am heartened by the continuing expansion of our Leisure Division where membership of our health clubs at 29 January 2006 was 55% higher than on the same date last year. Furthermore we look forward, in the coming months, to a number of replica kit launches for Premier League Clubs as well as the World Cup where I have more reason than most to wish England luck!”
The stand-alone stores recorded sales of £656.1 million, up from £710.6 million. Revenue from all the retail stores in 1H06 fell £28.3 million or 8.1%, while revenue in 2H fell £2.9 million or 0.8%. The lower decline was attributed to JJB's promotional stance. However, this had a consequent effect upon the gross margin, resulting in the combined gross margin achieved during the 1H (including the gross margin from the health clubs) of 49.5%, falling to 45.4% in 2H.
The Leisure Group (including centers with retail operations) posted sales of £89.2 million vs £62.7 million. The retail unit's operating profit fell from £103.4 million to £71.7 million. On the other hand, the Leisure BU had an operating profit of £15.1 million vs £9.6 million.
The value of inventories was £120.3 million, 6.7% higher than at January 30, 2005. While this increase partly arises from the achieved level of revenue being slightly lower than that planned and from the increase in the retail store selling area of 3.9%, the ratio of current to non-current stocks has improved.
An appeal by JJB to the Competition Appeal Tribunal vs the decision of the Office of Fair Trading regarding the price-fixing of certain replica kit products had resulted in a reduction in the amount of the penalty of £8.4 million to £6.7 million.
JJB was disappointed with the CAT’s judgment on liability and the consequent amount of the reduction in its penalty, and applied for permission to appeal to the Court of Appeal against those aspects that it was possible to appeal. It has now been granted permission to appeal, which will be heard in May.
On the basis of legal advice regarding the appeal to the Court of Appeal, JJB decided to make a provision against the penalty of £2 million in its accounts for the 53 weeks ended January 30, 2005. Acknowledging the specific grounds on which it intends to appeal and the inherent uncertainty of the appeal process, JJB has decided, on the basis of further legal advice, to increase its provision against the penalty to £3.88 million in its consolidated income statement for the 52 weeks to January 29, 2006.
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