DETTA INLÄGG ÄR ETT UTDRAG UR KVARTALSBREVET JAG SKICKADE TILL PANDIUMS ANDELSÄGARE 3 AUGUSTI 2016.
The Brexit caused a stir in the market and we used the opportunity to invest in Sports Direct International (SPD), an UK-based sports retailer. SPD sell their own and branded sports-goods in stores and online. They have become the largest sports retailer in the UK through a well executed low cost/low price strategy.
It’s run by Mike Ashley (founder, Chairman and majority owner) and David Forsey who has been CEO since 2001. Although they have been getting a lot of criticism lately I like everything about them. They have integrity, are hard working and good at what they do. An example of this is the compensation structure they’ve set up for themselves. Mike doesn't get paid anything. David has a very low salary of 150,000 GBP but earns a (big) bonus if he reaches ambitious five-year targets. It’s not very common to see these kind of true “pay for performance” structures.
The shares of SPD has gone from c. 8.00 GBP a year ago to 2.80 GBP today because of several reasons, none of which I think affects the company long-term:
- A report by The Guardian revealed that SPD paid some of its workers less then minimum wage (by not paying them while they were going through security checks after work). It led to SPD being investigated by the Commons Business Select Committee. The investigation showed some other minor malpractices. After going through the findings and the subsequent actions from SPD I’m even more impressed by the team. The practices had developed organically, as many of these things do, and were not known or approved by the senior management. Mike and the team showed sincere concern and immediately took action on the raised issues. Although SPD did get bad publicity these things usually subside.
- The results for 2015 were not as good as the market had expected due to various reasons that are more short term in nature.
- SPD was then removed from the FTSE 100 and Stoxx 600 indices which forced some index funds to sell the stock.
- The final blow was the Brexit vote. The expected recession and weakened Pound are both negative for SPD and near term results will suffer. That said, I would expect the low cost/low price operator of the industry to be the most resilient in such an environment.
To sum up: it’s been a bad year. But looking at the fundamentals, a bad year for SPD means producing a return on equity of 22% and an operating profit of 280 million (slightly less than last year). Most importantly I don’t expect any of the events above to have a long-term negative effect on the company. Things might of course become worse, but the price of the stock more than reflects that. We paid around 6 times last year’s earnings for SPD. For comparison, their largest competitor in the UK, JD Sports is trading at 25 times and the FTSE 100 is at 20 times.