Sports Direct looks a tempting buy on a lot of metrics, trading 43% below its 200 day moving average, a forward PE of 8.2, minimal net debt and yet something doesn't smell right about this business and I am not talking about Mike Ashley.
The phrase that didn't sit right with me from the preliminary results announcement was "continued investment in inventory". Isn't inventory something you sell at a profit rather than "invest" in? Let's have a quick look at this policy of "investing in inventory"
All figures £000's. Year end 30 April.
| Sports Direct | 2011 | 2016 | % Increase |
| Sales | £1,599 | £2,904 | 82% |
| Inventory | £217.9 | £702.2 | 222% |
| Accounts Receivable | £53.9 | £292.6 | 239% |
That's an awful lot of consistent "investing". The "investing" in accounts receivable is even more impressive. The company has 50% of its equity tied up in trainers and t-shirts. With a gross margin of 44% Sports Direct is turning its stock over only every 23 weeks; 23 weeks to sell a t-shirt? I have heard a lot of stories about the manipulation of stocks in retail businesses, I wonder if they are true? But Mike Ashley is an entrepreneur and entrepreneurs have far more important things to worry about than a grip on working capital.
I pass on this value stock, even at 262p.
Bonitabeach
No position.
