Interpretation of Published Accounts

The performance of the two firms, albeit dissimilar in some key ratios, can be lauded given the ability of the two firms to continue to perform well in a challenging industry. In recent months, JJB Sports went into administration as it was unable to compete effectively in the market which is dominated by Sports Direct and JD Sports. Specifically, “JJB Sports collapsed leaving £210 million to unsecured creditors with the sportswear group falling into administration last month, leading to the closure of 133 stores and the loss of around 2,200 jobs with JJB owing £10 million to sportswear group Adidas, while Nike and Umbro were each owed £8 million, according to a report filed by administrators at Companies House with landlords reportedly owed a further £9 million, while the taxman was owed £2.9 million” (Yahoo News, 2012).

The result of the failure of JJB was that 20 of the stores of JJB Sports were bought by Sports Direct, one of the firms focused on in this analysis. This was surprising given that five years ago, JJB Sport was considered to still be one of the top sportswear firms in the UK when it was still a large UK seller of sportswear (Smale, 2012). The challenge for JJB Sports provides an indication of the position of the key players in the industry. Smale (2012) noted that “JJB’s main issue is that it never really found a proper point of difference; if you look at its two main rivals, Sports Direct is very much focused on offering the best possible value for money while JD Sports is at the fashion end of the sportswear market, and both are very focused, and , in contrast, JJB didn’t fit in with either of those as it didn’t have a coherent offering, so there was no reason for customers to want to go there – it was more expensive than Sports Direct and did not have as fashionable an offering as JD Sports.”

Overall, the retail industry is facing considerable pressure because of the market environment. Ruddick (2012) notes the challenge for retailers as follows: “a combination of stores needing to be fully stocked for the key Christmas trading season, suppliers asking for ever shorter payment terms and shoppers playing a waiting game for price reductions and sales will put considerable cash flow pressure on those retailers already experiencing financial distress.” This was the driver in the closure and failure of JJB Sports as the firm was unable to compete effectively in the market dominated by Sports Direct and JD Sports.

A comparison with JJB Sports is not possible given the situation where Sports Direct has bought a large part of the firm and most of the stores. The website of JJB Sports is already directed to the Sports Direct website thus preventing an analysis of JJB Sports as a standalone firm. In any case, given the failure of JJB Sports, it would not be a good comparison for Sports Direct and JD Sports as its financial ratios and metrics over the last few years would probably be skewed towards unfavourable levels hence the result to administration of the firm.

INVESTMENT RECOMMENDATION

The assumption in this scenario is that Dave Jones is a risk averse investor with a deep sense of reliance on financial and investment analysis to support decisions relating to investments made. The request for the financial analysis of the two firms can be considered to be a logical approach for a risk averse investor with Dave Jones seeking to have the analysis provides the supporting assessment to make the decision.

Given this assumption, the recommendation for the investment is for Dave Jones to invest in Sports Direct. While there are differences in the financial ratios of Sports Direct and JJB Sports, both could be considered to be strong possibilities for good investments. The financial ratios of the two firms are generally robust which means that either could provide Dave Jones with the returns that are of value to investors.

The key difference which sways the recommendation to Sports Direct and not JD Sports is the considerable difference in the investment valuation ratios. As a risk averse investor, Dave Jones would be looking at an investment that would be considered of good value and which would provide a relatively low risk investment versus other decisions. The poor investment valuation ratios depicted by JD Sports could be an indication of the challenges that the firm faces in a competitive industry and market environment. As indicated in the industry analysis, Sports Direct has a coherent offering and provides good value for money whereas JD Sports is focused on the fashionable end of the market. In a depressed economic environment, the offering of Sports Direct would be considered one that has the possibility of remaining successful. The offering of JD Sports towards the fashionable end of the market could be challenged further if the economic environment continues to deteriorate.

The drawback in the investment recommendation is that there may be relatively limited upside for the stock of Sports Direct when compared with the stock of JD Sports. This is seen in the investment valuation ratios where the ratios for Sports Direct already represent ‘full’ value when compared to the ratios for JD Sports, i.e. the valuation of Sports Direct already reflects an understanding of the market of the opportunities available to Sports Direct while the valuation of JD Sports shows a potential for the value to improve considerably if there is greater understanding of the market and the investors of the position and value of JD Sports in the sports wear market in the UK.

The recommendation for Dave Jones is rationale for several reasons: 1.Sports Direct has a good position in the industry: The firm is one of the leading sportswear firms in the UK and has established a good footprint in the UK market. Its proposition of providing value for money places it in a good position to continue to see success in the market with the challenging economic environment. 2.The financial ratios of Sports Direct are robust: The financial ratios of the firm are mixed with some of the financial ratios deteriorating over the past years. However, this is a reflection of the challenging economic environment with JD Sports also showing deterioration in some of the key metrics considered.

Overall though, the financial ratios of Sports Direct represent a business that has performed well and is positioned to continue to perform strong despite the difficult market environment. 3.The share price of Sports Direct reflects the value assigned by investors: The investment valuation ratios of Sports Direct indicate the value attributed by investors to the stock. The investment valuation ratios are much higher than the ratios of JD Sports and this probably indicates that there may be limited upside for investors of Sports Direct. However, as a risk averse investor, Dave Jones will see Sports Direct as the logical choice between the two firms as the value of the share price would not be expected to fluctuate as much as for JD Sports. The investment is one for more risk averse investors.

It is expected that the investment in Sports Direct will be consistent with the overall risk profile of Dave Jones.

REFERENCES

1.Hopwood, W., & McKeown, J. C. (2003) “Market Effects, Size Contingency and Financial Ratios”, Review of Accounting and Finance, Vol. 2 Iss: 1, pp.3 – 15

2.JD Sports (2012) “Annual Report and Accounts 2012”, [Online] Available from http://www.jdplc.com/investor-relations/reports.aspx [Accessed on 10 November 2012]

3.JD Sports (2011) “Annual Report and Accounts 2012”, [Online] Available from http://www.jdplc.com/investor-relations/reports.aspx [Accessed on 10 November 2012]

4.JD Sports (2010) “Annual Report and Accounts 2012”, [Online] Available from http://www.jdplc.com/investor-relations/reports.aspx [Accessed on 10 November 2012]

5.Ruddick, G. (2012) “Retailers face ‘perfect storm’ of September rent day” The Telegraph, 27 September 2012, [Online] Available from http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9571842/Retailers-face-perfect-storm-of-September-rent-day.html [Accessed on 10 November 2012]

6.Smale, W. (2012) “What went wrong at JJB Sports?” BBC News, 1 October 2012, [Online] Available from http://www.bbc.co.uk/news/business-19635988 [Accessed on 10 November 2012]

7.Sports Direct (2012) “Annual Report 2012”, [Online] Available from http://www.sportsdirectplc.com/annual-reports-and-presentations/2012.aspx [Accessed on 10 November 2012]

8.Sports Direct (2011) “Annual Report 2011”, [Online] Available from http://www.sportsdirectplc.com/annual-reports-and-presentations/2011.aspx [Accessed on 10 November 2012]

9.Sports Direct (2010) “Annual Report 2010”, [Online] Available from http://www.sportsdirectplc.com/annual-reports-and-presentations/2010.aspx [Accessed on 10 November 2012]

10.Teoh, L.K. (2009), M05EFA Financial Analysis and Decision Making, 2nd edn, complied, Essex: Pearson Education Ltd.

11.Yahoo News (2012) “JJB Sports ‘owed creditors £210m’”, 11 November 2012,
[Online] Available from http://uk.news.yahoo.com/jjb-sports-owed-creditors-210m-200156573.html [Accessed on 12 November 2012]