Is Sports Direct International Plc A Buy Now It’s To Cough Up The Minimum Wage?

Balancing ethical concerns with seeking the highest possible profits has always been a point of tension among investors who actually care about more than just their bank balances. But now, investors in Sports Direct International (LSE:SPD) for whom the ethical treatment of employees is important can perhaps sleep a little more soundly. Billionaire boss Mike Ashley has agreed to pay “directly employed UK employees and directly engaged casual workers” more than minimum wage from 1 January.

Under pressure

Sports Direct has been under pressure for some time after an investigation by the Guardian claimed that unpaid time spent in searches at the end of workers’ shifts, coupled with “harsh deductions” for clocking in as little as just a minute late, meant they were effectively being paid less than minimum wage. And that also meant Britain’s 22nd wealthiest person could be benefiting to the tune of millions from those lost payments.

In response to that report, calls were raised for an HM Revenue and Customs investigation into the firm, with former shadow business secretary Chuka Umunna branding it “a bad advert for British business and one with a culture of fear in the workplace“. So the latest announcement does seem to be something of a crisis-driven attempt to fend off further criticism.

The new pay regime will, apparently, knock £10m per year off the company’s bottom line. But many will say that’s £10m per year that should have been going into its employees’ pockets anyway. And it’s really not a huge amount off the £313.5m in pre-tax profit the company reported in the year to April 2015.

And it will surely not address concerns that have been raised about Sports Direct’s significant use of agency labour. Agency workers won’t be covered by its latest commitment, which applies only to directly-employed and directly-engaged staff.

Should you buy?

Sports Direct’s employment practices have certainly helped enrich shareholders, with years of double-digit annual EPS rises helping push the shares up 239% over the past five years to 574p. However, the price has fallen 20% in the past 12 months, with the Guardian‘s investigation into the firm triggering a sharp dip in early December.

The company doesn’t pay a dividend, but there are EPS rises of 11% and 15% currently forecast for the years to April 2016 and 2017. This puts the shares on a P/E for the current year of around 13, dropping to 11.5 for the following year, although that will probably be downgraded slightly now that the company is set to pay its employees a little above mere subsistence level.

The FTSE 100’s long-term average P/E stands at around 14, though that’s for an index with a long-term average dividend yield of around 3%. On that score, Sports Direct should be on a lower P/E, though its growth prospects should bump that back up again. On fundamentals then, it’s probably a fair investment today.

But one thing I’d like to suggest to Mr Ashley – if you’re really concerned about the welfare of the workers who have toiled to earn you your billions, how about considering offering the Living Wage rather than just your minimum legal obligations?

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.