Struggling JJB has a sporting chance of survival

Published on 06/12/2008 13:37

WHEN JJB Sports boss Chris Ronnie steals a few moments for himself before delivering the embattled retailer's trading update this week, it's possible he'll draw inspiration from the photo gallery of English cricketers that lines his office wall.

As the England cricket team continues to dither over whether to return to India before Christmas, Ronnie knows he faces tough decisions of his own if he is to rescue the chain he took control of only last year.

Shoppers recovering from the loss of 99-year-old Woolworths from Britain's high streets are confronted with yet another retail tale of woe. By last Thursday night JJB's share price had lost more than half of its value as fears grew for its future.

While the City rumour mill churned out stories about breaching its banking covenants, Ronnie was forced to rush out a statement saying it was holding "constructive" discussions with its lenders HBOS, Barclays and Kaupthing as he tried to stem the flight from JJB stock. But with the first loan, a 20m bridging loan with Kaupthing, due to be paid by the end of this month and no concrete assurances over its 15m facility with HBOS, plus its 60m facility with Barclays, shareholders were unconvinced and JJB starts the week tomorrow with a market capitalisation of just 44m, 51m less than its total debt burden.

When Glasgow-born Ronnie, who moved to Manchester as a child, issues his latest forecast on Wednesday, he'll therefore find it difficult to shirk the question on every retail analyst's mind: will JJB be the next high street name to join Woolies and MFI on the scrap heap?

Retail analyst Nick Bubb of Pali International says the signs are not good. He points to the retailer's recent 95%-off sale as a sign of the desperate situation in which Ronnie, who worked for Sir Tom Hunter's Sports Division before it was sold to JJB in 1998, now finds himself.

He does not expect the figures Ronnie is preparing over the weekend to offer much cheer. "Their trading has been dreadful," Bubb says. JJB has admitted it is racing to raise cash as all retailers face a dismal festive period. It has hired Lazards to advise on the sale of its chain of fitness clubs, which recent figures show has been outperforming the rest of the business.

It was rumoured last month that JJB's founder and owner of Wigan Athletic football club, David Whelan, who sold his majority stake to Ronnie last year, was eyeing the 54-strong fitness chain for 100m.

Panmure Gordon analyst Philip Dorgan points out that if a sale was to go ahead at that price, it would solve all of JJB's debt problems and effectively hand Ronnie a "get out of jail free" card.

But talk of Whelan's involvement has gone quiet and sources close to the situation hint he is no longer interested in coming to Ronnie's aide.

Bubb argues it wouldn't necessarily be easy for Whelan or other interested parties to make a go of the gyms business, particularly in the current climate when consumers are cutting down on leisure activities. "It's not a great time to be buying a chain of fitness clubs," he says. "It's also not easy to extricate that business from the retail chain. There are shared sites."

David Stoddart, retail analyst at Altium Securities, says if anyone does opt for the gym clubs, it's unlikely a sale can be concluded before Christmas, which won't help Ronnie with his immediate problem of the 20m Kaupthing deadline at the end of this month.

"I'd be surprised to see anything happen on that (the gyms business] before Christmas," he says. Last week the Office of Fair Trading also appeared to pour cold water on any hopes of sports billionaire Mike Ashley, owner of Sports Direct and Newcastle United, becoming his saviour.

On Wednesday, the OFT launched an investigation into Sports Direct's stake in JJB, which Ashley upped to 21% in October, questioning whether it amounted to a "relevant merger situation". Analysts now fear Ashley will be forced to offload part of his holding, with worrying ramifications for JJB's cash position.

Ashley's decision to increase his stake had initially sparked speculation that he would mount a takeover bid. When rival JD Sports also then paid 8.1m for a 10% stake in JJB last month, expectations grew in the City that there could be a bidding war between the two giants.

But Bubb of Pali International says hope is now waning on that front. He argues that if Ashley or JD Sports had seriously intended to buy JJB they need not have bothered raising their stakes.

Instead, they could simply have made a bid directly to JJB's banks. "If they really wanted to buy it, they could deal directly with the banks," he said.

Stoddart of Altium Securities also questions why JD Sports in particular would be interested in buying JJB after it has made an effort to diversify its stock, concentrating on the more expensive fashion-orientated end of the retail market, rather than cheaper sportswear and equipment – a strategy which has so far allowed it to buck the retail downturn.

"It's not clear to me why JD would want to go back into the commodity end of the market," says Stoddart.

But as shareholders prepare themselves for a massacre on Wednesday, Stoddart adds that there is a flicker of light. Were Ronnie expecting to deliver a forecast significantly below market expectations, under market rules he would have been obliged to issue a warning last week. He didn't. Therefore, Stoddart argues, shareholders shouldn't necessarily assume the worst.

Dorgan of Panmure Gordon also insists that, unlike some other struggling retailers, JJB has assets to sell and it still has decent cash flow. Although he is not expecting fireworks this week, he says there is still some small cause for optimism.

But whatever forecast Ronnie delivers when he steps up to address the sea of City scribblers, Bubb points out at least one thing is for certain: there is more drama to come from JJB. "It's a very, very messy situation," he says.