JJB shares plummet as fresh debt problems spook the City

Struggling sportswear retailer JJB Sports needs a rescue injection of cash, analysts said yesterday, after the group warned it was likely to breach the terms of a key agreement with Bank of Scotland.

• JJB shareholders are braced for a deeply discounted rights issue after doubts surfaced over debt problems Picture: PA

Shares in the company plummeted by a third at one stage to hit a two-year low as investors braced themselves for a deeply discounted rights issue little more than a year after a cash call for 100 million.

JJB, which issued a profit warning last month, said sales at stores open more than a year had remained below expectations and were likely to be hit further by the heavy snowfall and freezing temperatures sweeping the country.

Nick Bubb, a retail analyst at Arden Partners, said: "Shareholders should be braced for a heavily dilutive rights issue to keep the company alive."

Analysts said the retailer was suffering from a step up in promotional and advertising activity from larger rival Sports Direct, which is controlled by Newcastle United football club owner Mike Ashley.

The trading slump means JJB expects to breach certain financial covenants - an agreement between a company and a creditor that it should operate within certain limits - over a 25m Bank of Scotland loan.

It said it was engaged in "constructive discussions" with the bank about the breach due at the end of January and the future financing of the business.

Stockbroker Seymour Pierce kept a "sell" rating on the retail chain, while raising its recommendation on Sports Direct to "buy" from "hold".

JJB, which operates nearly 250 stores and employs more than 6,300 staff, was driven to the brink of collapse during the recession, but survived thanks to a deal to sell its fitness club business to founder Dave Whelan, a debt restructuring with creditors, new banking facilities and an equity fundraising.

It has since been refitting stores, improving its online presence and refocusing its strategy to target keen amateurs, recreational sports participants and sporting families under a "Serious about Sport" mantra. Sports Direct is seen as having a stronger focus on cut-price fashion.

JJB did strike one positive note yesterday by reporting an encouraging performance in six recently refitted branches, with sales 11 per cent above the company average between 1 November and 28 November.

Peel Hunt analyst John Stevenson said these stores were likely to be at the heart of JJB's pitch for more money.

"An equity fundraising and a higher debt facility will be required, in our opinion," he said.

The retailer said it was looking at other restructuring options and alternative sources of finance, without giving details.Panmure analysts said these might include the sale and leaseback of its head office and/or the sale of two remaining fitness clubs in Ireland, but added these were unlikely to make a big difference.

JJB's recent updates contrast with like-for-like sales growth of more than 20 per cent in the run-up to the football World Cup, when profit margins also strengthened.

Shares in the group closed down 18 per cent, or 1.04p, at 4.74p having been as low as 4p earlier in the session.