SPORTS DIRECT INTERNATIONAL PLC Annual Report 2010 SECTION 1 // OVERVIEW // 01 2010 Highlights 02 Sports Direct at a Glance 04 Chairman’s Statement SECTION 2 // THE BUSINESS REVIEW // 06 Chief Executive’s Report 26 Financial Review SECTION 3 // MANAGEMENT AND GOVERNANCE // 36 The Board 38 Directors’ Report 43 Corporate Governance Report 50 Directors’ Remuneration Report 57 Directors’ Responsibilities Statement 58 Corporate Responsibility Report SECTION 4 // FINANCIAL STATEMENTS AND NOTES // 64 Report of the Independent Auditor to the Members of Sports Direct International plc 65 Consolidated Income Statement 66 Consolidated Statement of Comprehensive Income 67 Consolidated Balance Sheet 68 Consolidated Cash Flow Statement 69 Consolidated Statement of Changes in Equity 70 Notes to the Financial Statements 109 Report of the Independent Auditor to the Members of Sports Direct International plc 111 Company Balance Sheet 112 Notes to the Company Financial Statements 116 Consolidated Five Year Record SECTION 5 // ADDITIONAL INFORMATION // 117 Shareholder Information 2010 Highlights • Group revenue up 6.2% to £1,452m • Strengthened our UK market leading (2009: £1,367m) position • UK Retail up 11.0% to 1,118m • Successfully expanded UK and (2009: £1,007m) International Retail store portfolio • International Retail up 17.2% to £119.9m (2009: £102.3) • Strongest ever trading day in • Brands division down 17.4% to £190.5m Company history (2009: £230.5m) • Growth in Brands licensing - 71 • Underlying EBITDA up 17.3% to licenses signed during the year £160.4m (2009: £136.8m) • World’s first retail Training Academy • Underlying profit before tax up 49.8% created in partnership with Nike to £102.1m (2009: £68.2m) • Reported profit before tax up 1,016.8% to £119.5m (2009: £10.7m) • Group gross margin decreased by 20 basis points to 40.6% (2009: 40.8%) • UK Retail gross margin down to 41.3% (2009: 42.5%) • Underlying earnings per share up 56.2% to 12.39p (2009: 7.93p) • UK Retail like-for-like gross contribution increased by 3.4% • Substantially reduced net debt by 27.7% to £311.9m (2009: £431.3m) • Net debt to underlying EBITDA of 1.9 times • The Board decided not to recommend a final dividend sports direct international plc // annual report 2010 // p.1 sports direct at a glance a brief overview of our business What we do the Group’s uK stores (other than Field & trek) supply strengthened following the acquisition of universal a wide range of competitively priced sports and leisure cycles by the introduction of a range of cycle products equipment, clothing, footwear and accessories, under in both stores and online. a mix of brands. We stock third party brands including adidas, nike, reebok and puma. Group owned brands as at 25 april 2010 the Group operated out of 387 stores include dunlop, slazenger and lonsdale and we also in the united Kingdom (excluding northern ireland). the use licensed in brands. majority of stores trade under the SPORTSDIRECT.com fascia, although Field & trek stores trade under their a significant proportion of the revenue in the stores is own fascia. derived from the sale of the Group owned and licensed in branded products, which allows the retail business to generate higher margins, whilst at the same time Where we are differentiating the Group’s stores from its competitors, both in terms of the range of products on sale and the the Group has retail interests outside the uK and has competitive prices at which they are offered. a flexible approach to entry into new markets. these interests include wholly owned retail outlets (in Belgium, Field & trek operates out of 19 stores in the uK, Holland, luxembourg and slovenia trading as sports selling a wide range of camping and outdoor equipment, direct), joint ventures with other retailers (such as in waterproof clothing and footwear, including leading Heatons stores in northern ireland and the republic of brands such as Berghaus, Merrell and salomon. ireland) stores within another retailer’s store (as in cyprus). the acquisition of Field & trek gave the Group an entry into the outdoor market, which had been identified as a strategic opportunity for the Group, and that has been sports direct is the uK’s leading sports retailer by revenue and operating profit, and the owner of a significant number of internationally recognised sports and leisure brands. SECTION 1 // OVERVIEW // our Brands the Group’s portfolio includes a wide variety of internationally recognisable sport and fashion brands. the Group’s retail division sells products under these Group brands in its stores, and the Brands division exploits the brands through its wholesale and licensing businesses. the Brands division wholesale business sells the brands’ core products, such as dunlop tennis rackets and slazenger tennis balls, to wholesale customers Retail BRANDS and distributors throughout the world, obtaining far 87% of Group sales 13% of Group sales wider distribution for these products than would be the case if their sale was restricted to Group stores. the wholesale business also wholesales childrenswear and other clothing. the licensing business licenses third parties to apply Group owned brands to non-core products manufactured and distributed by those third parties, and third parties are currently licensed in different product areas in over 100 countries. the Brands division is closely involved in the development of licensed products and monitors licensees and their manufacturers to ensure product quality, presentation and consistency with the appropriate brand strategy. the Brands division continue to sponsor a variety of prestigious events and retain a base of globally recognised, high profile sports men and women. in tennis, slazenger continues to be the official ball supplier for the Wimbledon championships and dunlop’s professional tour team continues to grow, with the recent additions of Fernando Verdasco and nikolay davydenko, both ranked in the world’s top 10 tennis players. Golfers darren clarke and in particular lee Westwood continue to shine in major tournaments under the sponsorship of dunlop. international cricket captains paul collingwood & Michael clarke continue to be sponsored by slazenger whilst other sports such as badminton and squash continue to provide brand exposure for carlton and dunlop respectively. the portfolio of boxing brands within the Group remains strong as lonsdale celebrates 50 years and everlast 100 years as specialists in manufacturing combat sports equipment and apparel. Both brands have a stable of sponsored boxers and mixed martial arts fighters that continues to grow. sports direct international plc // annual report 2010 // p.3 chairman’s statement in common with other sectors of the economy, market as previously announced, the Board is sorry to lose conditions in sports retail remained challenging non-executive director Malcolm dalgleish who has throughout the period under review. our focus remained decided to stand down at the next aGM. We thank him firmly fixed on doing what we do best – providing for his contribution and will miss his wise counsel. We consumers with the widest possible range of the best are pursuing the appointment of a replacement and will products at the most competitive prices available. our update shareholders in due course. aim is to offer quality footwear, clothing and equipment for every category of customer from the fashion conscious Management remains determined to provide the best to serious competitors. the Group has a robust business products at the most competitive price in the market place. model, whose worth has been proved once again this year We will continue to expand the number of stores, develop in the delivery of strong results from the Group. further strategic partnerships and enhance our product range and customer experience. We are determined to in addition to exceeding our expectations outlined 12 strengthen our position as the uK’s leading sports retailer months ago in terms of both profit performance and debt and will expand our foothold on mainland europe. reduction, we are pleased with our sales performance both in the stores themselves but also with the increased sales Finally, on behalf of the Board, i would like to thank all our in our growing internet business. We continued to develop employees whose commitment and expertise have helped our international store network and were pleased with us to meet our 2010 targets and to deliver a strong set of progress made in changing the balance of sales mix from results in what continues to be a challenging economic wholesale to licensing in the Brands division. We made environment. on a personal note, i am delighted to join significant progress in our debt reduction programme such a talented and hard working team and am confident during the year, paying down £119m, and intend to that significant further Group success lies ahead. continue to reduce debt further in the coming year. this is a key consideration in the decision not to pay a final Keith Hellawell dividend this year. non-executive chairman partnerships with world famous suppliers such as nike and adidas, to name only two, are critically important 22 July 2010 to our business and we value such relationships highly. We are delighted to be creating a unique nike training academy at our shirebrook headquarters in partnership with nike where sports direct staff will benefit from extensive, specialist training in the current nike range as well as likely future developments. this is the first time nike has joined with a retail partner in such a facility anywhere in the world. We welcome this innovative extension of our relationship with a valued third party supplier as well as the opportunity to take our staff training standards on to a new, industry leading level. the announcement in august 2009 of the competition commission’s interest in our acquisition of 31 stores from JJB sports PLC and the potential investigation into our affairs by the office of Fair trading and the serious Fraud office caused concern and reflected adversely on our share price.