Sports chain looks unbeatable

Blacks Leisure, a retailer of sports goods, is emerging as one of the most spectacular turnaround stories in the stock market. The shares have more than quadrupled since the start of the year as investors have realised that profits are entering a phase of promising growth. Even now, however, the full scale of the improvement is not fully reflected in the price and the shares could well double again in the next 18 months.

The latest charge in the stock follows the company's annual meeting at which it reported that like-for-like sales across the board were up 24 per cent over last year. Impressed by these figures, the firm's stockbroker has upgraded its profit forecast for the full year from pounds 5.4m to pounds 7m. That would put earnings per share at 14.7p, which means that one of Britain's fastest- growing retailers stands on a prospective price/earnings ratio of just 12.7 times. By contrast Marks and Spencer is on a prospective p/e of 18.5 and rival sports goods chain JJB Sports is on 20.5.

As recently as last year Blacks Leisure seemed to be struggling, with sales of pounds 65.6m producing profits of pounds 620,000. The operating profit margin was 1 per cent and return on capital 5 per cent, although even that was an improvement on two years previously, when the group had been making losses. Three principal forces have been at work in laying the groundwork for the recovery. First Simon Bentley, the chairman and chief executive, disposed of underperforming businesses including Quasar, a disastrous football brand.

Second, there was a programme of investment in all the behind-the-scenes aspects that make a retailer successful. This included improving the warehouse and distribution network, installing electronic point of sale (Epos) equipment and stepping up staff training to improve service levels, product knowledge and sales skills.

The third factor has been the buoyancy of the sportswear market, helped by events such as the Olympics and the European football championship. Unlike the struggling Olympus chain Blacks Leisure is especially focused on the sports clothing market, although it does sell some equipment. It is also totally brand oriented. Unlike Olympus it does not have an own- label brand nor does it plan to introduce one. Mr Bentley believes there is a huge market for sportswear worn as leisure clothing but says people want the reassurance, excitement and cachet of brands supported by huge promotional budgets.

Blacks Leisure operates three retail formats of which the most important is First Sport. Some idea of the growth momentum here is provided by like- for-like sales up 26 per cent so far this year. Seven outlets have also been opened since March against three last year, taking the total to 51. These are typically in prime high-street locations or shopping centres and sell footwear, clothing and equipment from manufacturers such as Nike, Reebok and Adidas. This is what Bentley calls street fashion for those between 12 and 18 buying trainers, shorts, jogging bottoms and T-shirts.

A new format launched last year is ActiveVenture, which sells sporty but fashionable outdoor wear like Timberland, Burberry and Rockport. Decor includes boats suspended from the ceiling and even, in one shop, an old pair of cathedral doors. Landlords at shopping centres such as Lakeside in Thurrock, Essex, welcome the group with open arms. In a year, the number of outlets has grown from one to nine.

The longest established of the retail chains, Blacks Leisure, which sells camping gear and ski equipment, is not in such a heady growth phase. Two large outlets in London and Manchester are being refurbished, with more change planned for the rest of the 37-strong chain.

Profit forecasts by analysts of pounds 7m for the year to end February 1997 compare with the pounds 2.1m made last year - evidence enough of the remarkable progress the group is making. Beyond that, however, there is scope for much more to come.

Mr Bentley reckons he can add 30 outlets a year to the 92 in May. Throw in like-for-like growth even at a more modest pace and profits should move ahead at a healthy rate. The shares look an outstanding buy.