Hold­sport: An at­trac­tive in­vest­ment propo­si­tion

Finweek English Edition - - PRO PICK - BY SELEHO TSATSI In­vest­ment an­a­lyst, Can­non As­set Man­agers

Hold­sport is a sports and out­door goods reta i l er. Sports­mans Ware­house is the ma­jor con­trib­u­tor of rev­enue (74%), fol­lowed by Out­door Ware­house ( 2 3%) a nd Ap­parel Whole­sale (3%).

Since relist­ing in 2011, Hold­sport has con­sis­tently earned above 20% re­turn on eq­uity. The com­pany earned R188m on its ini­tial eq­uity cap­i­tal of R900m. This 21% re­turn on eq­uity falls in line with the group’s per­for­mance over the pre­vi­ous five years.

Af t e r s e v e r a l y e a r s of p o o r per­for­mance, Out­door Ware­house has im­proved mean­ing­fully as more man­age­ment re­sources and at­ten­tion to a unique strat­egy have been put into play.

The group is carv­ing a niche in the re­tail mar­ket. Man­age­ment has fo­cused on sports equip­ment and shied away f rom plac­ing too l arge an em­pha­sis on ap­parel. Ap­parel of­fers at­trac­tive mar­gins, but brings in­creased com­pe­ti­tion with the ma­jor fash­ion re­tail­ers. The rel­a­tive suc­cess of this dif­fer­en­ti­a­tion can be seen in the level and sta­bil­ity of the group’s gross mar­gin his­tory. Ad­di­tion­ally, the sport­ing and leisure goods mar­ket is not as ex­posed to fash­ion trends as other re­tail sec­tors. In­ven­tory has lower fash­ion ob­so­les­cence risk. As a re­sult, Hold­sport’s i nven­tory mark­downs are low by in­dus­try stan­dards, fur­ther pre­serv­ing mar­gins.

The re­turns on cap­i­tal achieved by Hold­sport are steady and likely to re­main so, given that the com­pany op­er­ates in a rel­a­tively sta­ble in­dus­try. Anec­do­tally, South Africans are keen and regular buy­ers of sport­ing and out­door goods and, while th­ese are highly dis­cre­tionary items, it is likely that South Africans will still be play­ing sports and re­quir­ing equip­ment in five

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48 or 10 years’ time.

The ma­jor­ity of cap­i­tal is in­vested in in­ven­tory and leased stores with leases gen­er­ally l ast­ing f ive to 10 years. Lo­ca­tions are in value cen­tres or stand­alone stores in recog­nised re­tail nodes, but the group is in­creas­ingly turn­ing to malls. Big-for­mat stores are used, which al­lows for a larger range of prod­ucts to be of­fered and the group is cur­rently pi­lot­ing Sports­mans and Out­door Ware­house stores ad­ja­cent to each other or un­der the same roof.

Hold­sport ac­quires about 70% of in­ven­tory from lo­cal sup­pli­ers and the bal­ance from in­ter­na­tional sup­pli­ers, although lo­cal sup­pli­ers im­port most of t heir mer­chan­dise. With l ong lead times, in­ven­tory turnover is low when com­pared to fash­ion re­tail­ers. Ad­di­tion­ally, the group has strug­gled to sell big-ticket items in re­cent years. This was seen in in­ven­tory turnover trend­ing down prior to f inan­cial year ( FY) 2015 re­sults, which showed a slight im­prove­ment.

Although t he com­pany aims to open two new stores per year, one store was opened in FY 2015, three were ex­panded and four were re­lo­cated. Lease agree­ments have been signed for four new stores in FY 2016, three of which have al­ready been opened and man­age­ment has de­scribed trad­ing at th­ese stores as sat­is­fac­tory.

At t he c ur­rent div i dend cover level, 20% of earn­ings are re­tained. Man­age­ment has ex­pressed its in­ten­tion to fur­ther lower the div­i­dend cover go­ing for­ward with­out spec­i­fy­ing a specif ic level. Cou­pled with cur­rent val­u­a­tions, Hold­sport is an at­trac­tive in­vest­ment propo­si­tion.

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