In 2014, Mike Ashley, the combative and controversial British retail magnate, was determined to take control of Elverys Sports. The Irish sports retailer, a major employer in the west of Ireland, had fallen into insolvency, and Ashley liked the idea of bolting on its network of 50-odd stores into his expanding Irish business.

Ashley was, however, slightly late to the party. For much of the previous six months, management at Elverys Sports had been quietly hatching a plan to acquire the business through a carefully orchestrated management buyout (MBO). Nama, the state’s bad bank that controls much of the group’s debt pile, has been squared off.

The Staunton brothers, who controlled the chain, were on side too, and had agreed to use the sale proceeds to pay down Nama debts. AIB had been lined up to provide finance, while Dublin corporate finance advisors Capnua had been brought on board for added financial muscle.

Days before the deal was due to close (structured as a pre-pack receivership), Ashley jetted into town. Arguing that he was willing to pay a 25 per cent premium for the Elverys network, he claimed he was locked out of the process, letting it be known he was willing to go to court to halt the deal.

It was a bold move and it nearly worked. Nama got cold feet, and appointed an examiner instead, clearing the path for Ashley to bid for the business. In the end, he lost out, with the company’s management team assuming ownership of the business, with the sportswear company O’Neill’s coming on board as a minority shareholder.

The deal was not without controversy and saw Nama accepting half of the €23 million it was owed while unsecured creditors were forced to write off 95 per cent of their debts. But the business had scraped through, albeit under different owners.

And up until the end of 2019, the company’s performance had been largely sluggish. Sales had plateaued at between €75 million and €80 million, while it was struggling to maintain sustained profitability. It was operating with low margins and facing increased competition at both the top and discount end of the business.

In 2019, the Staunton family regained control of the business when it bought back equity. However, even then, there was little sense of a long-term growth story.

And then Covid hit. It could have been a catastrophic event for the retailer. Instead, it was a turning point. This is the story of how the business used the crisis to cut costs, improve margins, pay down debt and boost profitability.

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Clothing retail is one of those industries where it’s hard to make more than a couple of per cent of margin. Clothes retailers have to be on the main street. They can’t save money by setting up in cheaper locations. Expensive locations drag down clothes retailers’ profit margins, but they push up footfall. The idea is that retailers make up for low margins on volume.

It is a model that could be heavily exposed when a pandemic shuts the high street for a sustained period. Yet, this is not what happened at Elverys, which trades as Elverys Intersport.

For a start, revenues held firm. In 2019, it had revenues of €86 million. In 2020, despite the economic lockdown, it had sales of €85.6 million. “Given the disruption to trade and overall uncertainty arising from Covid 19, this constitutes a solid trading performance,” the directors of the company said in its most recent accounts.

Essentially, the company’s online growth was enough to cover the fall off in physical sales at its bricks and mortar stores. This allowed the business to sustain turnover, but boost both margins and profitability, as it is cheaper to sell online than in-store.

The company’s cost of sales and its administration expenses both fell during the year. Like many companies we have looked at in recent weeks such as the Pettitt Group and Supermac’s, Elverys took the opportunity to take an axe to its cost base. It is most obvious when you look at the company’s wage bill and its headcount.

The number of employees fell from 650 to 496 during the year, while payroll costs fell from €12.4 million to €10.6 million.

Given the anaemic margins it had been achieving pre-Covid, this enhanced its margins and brought it more in line with rivals such as Heatons and Lifestyle Sports.

The company’s accounts put operating profit at €6.4 million, up from €2.7 million for the year before. However, the 2020 figure includes €2 million from so-called ‘other income’. We have stripped this out of our calculations of the company’s margins, as presumably, it relates to state wage supports. It may benefit from it again in 2021, but it is not a long-term revenue stream.

However, the €2 million did bolster pre-tax profits, which jumped from €1.8 million to €5.3 million.

In an analysis accompanying its results, Elverys states: “While the company’s stores were forced to close in early 2021, on-line operations remained fully functional. On-line sales continue to grow substantially, and it is expected that total turnover for 2021 will exceed 2020. Continued disruption to trade will be felt for the remainder of 2021, and into 2022, caused by global supply issues currently impacting deliveries from many key suppliers. The company is well stocked and continues to source alternative product, no adjustments to the accounts have been deemed necessary.”

Debt repayments and loan refinancing

The company also restructured debt and paid down loans in 2020. The company’s debt burden, allied to its low margins, had posed problems in previous years. But it has now moved to repair this.

At the end of the financial year, the company had assets of €34 million and liabilities of €20 million. Compared with last year, the net assets of the company have increased by €5.3 million.

It is worth looking at the debt profile in more detail, as it offers an insight into its pandemic strategy. Short term debt, essentially money due within a 12-month period, increased from €16.7 million in 2019 to €18.2 million in 2020. Much of this relates to money owed to the tax authority, which increased from €2.4 million to 5.3 million. Nearly all of this related to Vat payments.

It is unclear if this was a timing issue or whether the company availed of the tax warehouse scheme, which allows companies to hold back on the repayment of tax debt to bolster cash flow. Certainly, its cash in the bank increased from €6.6 million to €8.8 billion.

Long term bank debt fell heavily, from €6 million to €1.7 million. This pushed down the company’s interest bills. Overall, long term debt fell from €8.2 million to €3.8 million.

According to the company: “During the year ended 31 December 2019 the company re-financed it's loans from its Parent Company West Roxbury Trading Limited with a loan from Bank of Ireland. The loan is for a term of 5 years with monthly repayments calculated on a 10-year basis and additional sums collected based on trading performance.”

The turnaround has benefitted from the business and its owners. The retailer paid €205,000 each in consultancy fees to brothers John and James Staunton, while family members were also paid more than €1 million in rental payments.

The sports retail market

The Irish sports market is competitive. With 50-plus outlets, Life Style Sports is the market leader. It has grown sales and has been solidly profitable in recent years. In 2018, it had revenues of €111 million and pre-tax profits of €6 million. At the end of the year, it had retained profits of more than €36 million, highlighting the robustness of its balance sheet. It is owned by the Stafford family.

The British tycoon Mike Ashley owns the Sports Direct and Heatons brand here. It had revenues of €150 million for the year to the end of April 2020, posting a pre-tax profit of €17.6 million. Decathlon Sports, the €13 billion French sports retail giant, is expanding in Ireland. It has plans to open two more stores in Ireland "and expand in Limerick, Cork or Galway as a priority in the coming years", according to a directors' report in new accounts which show that Irish revenues at Decathlon Sports Ireland Ltd declined by 7 per cent from €17.8 million to €16.58 million last year.