Holdsport: An attractive investment proposition
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
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.