There are plenty of recovery plays around at the moment but this retailer is one of the riskiest of the lot.
You might think that investing is hard enough yet many of us make the process more difficult still by looking for risky recovery plays. These offer the prospect of spectacular gains and equally spectacular losses. The retailing sector is stuffed full of such opportunities at the moment. The expectation is that many well-known names won’t make it through 2009 and the shares are priced accordingly.
Near the top of many people’s lists of shares in trouble is JJB Sports (LSE: JJB). The former stock market darling held up pretty well for the first nine months of 2008 before issuing a weak set of results and creating a lot of confusion over whether it had breached the covenants on its banking facilities. The share price fell from 104p on 25 September to 12p on 8 October. Although a mini-recovery followed, the shares dropped below 3p in the run up to Christmas.
They’ve started 2009 in a much perkier mood however, with its shares leaping after a management shake-up that may hold the key to its survival.
The rise and fall
Recent events are a far cry from JJB’s debut on the stock market in 1994. Floated at the equivalent of 36p per share, it rose more than tenfold in just over three years. Despite losing three-quarters of its value in 1998, it then went on to set a new high in 2001 before a second rot set in.
For most of the last six years or so, it’s traded between 150p and 300p as the market ummed and ahhed about its prospects. Then came the recent covenant confusion and the credit crunch. Prior to all this though, the chain’s founder and former chairman, Dave Whelan, sold almost 70m shares at 275p in the middle of 2007. I think that’s what you call good timing!
Over the years, JJB has moved away from its sportswear roots. The acquisition of Sports Division in 1998 helped cause its first wobble but more recently it’s built up and sold a soccer pitch business and currently has around 50 health clubs it’s trying to sell.
At the end of 2007 it bought the Original Shoe Company from Sports Direct (LSE: SPD) for £15m. Six months later it paid £7m for a fashion retailer called Qube. These two loss-making businesses, known as JJB’s Lifestyle division, comprise of over 80 stores. They are also for sale but don’t appear to be attracting much interest.
All this activity has taken diluted JJB’s focus on its main retail chain. At the end of 2001 its profits hit £98m but they have fallen in every year but one since. Having a business whose profits are partially dependent on the success of the England football team certainly hasn’t helped matters!
The new brooms
On Friday morning, JJB shares opened at 4p. Then came the news that Sir David Jones, most famous for turning around the fortunes of Next (LSE: NXT) in the early 1990s, was to become executive chairman. Jones had been appointed as deputy chairman in October but is now taking over the top role. He will be assisted by Peter Williams, the former chief executive of Selfridges, who is joining as an executive director.
Former chairman Roger Lane-Smith moved down to deputy chairman while Chris Ronnie continues as chief executive with a focus on the day-to-day running of the business. Ronnie, in a joint venture with the Icelandic financial group Exista, was the unfortunate buyer of Dave Whelan’s shares in 2007. The value of this 27.5% stake in JJB has sunk from £190m to less than £6m.
JJB shares moved up to 5.5p by the close of trading on Friday and at the time of writing are up again today to 8.5p. That’s a fairly major vote of confidence in the new management team. There’s obviously a feeling that Jones and Williams would not have agreed to these roles if they didn’t think they had a good chance of succeeding.
Financials
The next trading statement from JJB is due on January 15 and it’s going to make ugly reading. Its sale started in November and revenues for its main chain were down almost 9% on a like-for-like basis for the period from late July to early December.
However, the health club chain still seems to be doing ok. It made profits before central costs of £17m last year and could fetch around £100m if a disposal can be agreed. Next got out of its hole in the 1990s by selling its Grattan mail order division so perhaps the sale of the health clubs business will provide the same boost for JJB?
Although JJB’s debt situation is far from peachy, it’s arguably less precarious than many other retailers. At the end of July it had net debt of £58m, comprising of a £60m five-year revolving facility started in 2005 and a £18m six-year loan taken out in 2006.
Both of these are charged interest at less than 0.5% over base rate but are being renegotiated at the moment. I think it’s fair to say the margin over base rate is going to be many, many times higher! A £20m bridging loan with Kaupthing was taken out in the autumn although this has been partially repaid since.
It’s possible that a sale of the health club business could wipe out most, if not all, of the company’s debt. If the Lifestyle division can be offloaded or wound down, you’d be left with the core retail business with around £600m in annual sales valued at around £20m.
That’s a lot of ifs although there is also the possibility that JJB could be snapped up by another sports retailer. Sports Direct owns 11% and JD Sports (LSE: JD.) recently took a 10% stake, the latter paying just over 30p per share.
Jones and Williams certainly have their work cut out to revive JJB’s fortunes. But the company now at least has a fighting chance of surviving 2009.
If you're looking for share ideas for 2009, take out a free 30-day trial to Champion Shares, The Motley Fool's share-tipping service. You can read all our tips and there is absolutely no obligation to subscribe.
