Dick's Sporting Goods takes stake in JJB

JJB Sports has been thrown a lifeline by US sporting goods retailer Dick's Sporting Goods, which has made a strategic investment in the struggling UK sportswear retailer.

Dick's is to invest an initial £20m in JJB, in return for which it will receive new JJB shares at a cost of 10p per share and convertible loan notes, plus representation on the JJB board.

Investment firms IAML, Harris Associates, Crystal Amber and BMGFT - the firm's four largest shareholders - are also to invest an additional £10m in JJB by exercising existing warrants and subscribing for new JJB shares.

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German sportswear manufacturer Adidas, a key supplier partner of JJB, is to pony-up security for a two-stage loan of up to £15m to assist in JJB's store transformation programme, which is being accelerated ahead of this year's UEFA Euro Championships and the London Olympics.

On top of all that, the Bank of Scotland has agreed to extend existing loan facilities until May 2015.

"We believe this investment package and strategic alliance with Dick's will provide a real opportunity to accelerate JJB's turnaround," said Keith Jones, Chief Executive of JJB Sports.

"We believe that JJB is a strong company with the potential to become a leading multi-channel sporting goods retailer both in Britain and throughout Europe," revealed Edward Stack, Chairman and Chief Executive Officer of Dick's Sporting Goods.

"We look forward to providing the company with financial support at this crucial stage of its turnaround and to using our expertise in the US market to help guide its growth efforts," Stack added.

Dick's has agreed to subscribe for the first tranche of convertible loan notes to the tune of £18.75m and has been granted the option to subscribe for the second tranche of up to £20m of convertible loan notes.

If both tranches are both fully converted, it will result in the issue of 887.9m new shares, which would represent around 61% of the enlarged issued ordinary share capital of JJB.

Dick's will have the right to appoint one representative non-executive director to the board of JJB for so long as it holds any unconverted convertible loan notes, or two representative non-executive directors to the board for so long as it holds at least 10% of the issued ordinary share capital of the company. In addition to these rights, Dick's will also be entitled to appoint two board observers (or one board observer for such time as Dick's has at least one non-executive director on the board).

Although virtually unknown in the UK and saddled with the sort of name which implies it is a one-man show operating from a local market stall, Dick's Sporting Goods operates 480 stores bearing its name in the US, plus 81 Golf Galaxy outlets. In 2011, Dick's tills took $5.2bn and the company made a post-tax profit of $182.1m.

The JJB board has been hard at work at a turnaround plan for the company but its plans have been constrained by the need to focus on preserving cash while getting shot of a mountain of stock that was selling about as well as last season's Milton Keynes Don's away kit.

In particular, the lack of cash has thwarted the board's plans to make JJB stand out from competitors in the sportswear market, such as Sports Direct and JD Sports.

The group has an "enhanced store concept" which it has been trying out in Broughton Park, Chester. Feeling pleased with how the trial has gone in Chester - like-for-like (LFL) sales are up 25.6% and the store's cash margin has grown by 24.5% on a LFL basis - the group is keen to roll out the new format.

The plan is to transform 25 stores before the end of October 2012 and then a further 35 stores in 2013 in a manner consistent with the concepts displayed in Broughton Park, Chester. The capital cost per store is planned at approximately £30 per square foot, bringing the total cost of this transformation programme over the next two years to over £20m.

JJB's full year results for the 52 weeks to January 29th, 2012, underline the reason why it needs to kick on with its transformation programme.

Revenue fell 21.7% to £284.2m from £362.9m the year before, more than £5m below the £289.5m expected by the market. The sales slump was exacerbated by the decision to close down 41 under-performing shops.

On the positive side, the adjusted operating loss narrowed to £56.2m from £73.9m a year earlier, while the adjusted loss before tax contracted to £53.9m from £73.3m; the market had been expecting an underlying loss before tax of £56.4m.

Gross margin increased from 34.4% to 35.7%.

The net debt situation improved, also, with net debt at the end of January down to £11.3m from £18.8m at the end of January 2011. However, by the beginning of April it had risen to £20.6m.

Trading since the end of the financial year-end has been tough. In the nine week period since the period end group LFL sales are down 5.7% year-on-year and the LFL gross margin decreased by 24.9% in monetary terms.

Trading and margin continued to be affected by management's careful control of the group's cash intake and stock profile, the statement from JJB said.

"Looking ahead, the ongoing credit squeeze on consumers and weaker UK employment numbers creates a tough environment," noted Chairman Mike McTighe. "However, the platform we have built over the past 12 months and the strategic investment and financing package that the company has announced today have given JJB a chance to complete its turnaround programme," McTighe added.

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