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Another try on the bonus front for Sports Direct

Article By: ,  Financial Analyst
June 9, 2014 6:24 PM

Shares of sports goods retailer, Sports Direct, are up around 1.5% (at time of writing) following the unveiling of the company’s new bonus plans.

A quick reminder…

Back in April, Sports Direct had planned to dole out some eight million ordinary shares to its executive deputy chairman, Mike Ashley, but only if the company met certain near-term financial targets.

Sports Direct subsequently withdrew that proposal after failing to garner enough shareholder support. Then, perhaps unsurprisingly, Mr Ashley, who at the time held a 62% stake in the company, decided to cash in a little by selling some 20 million shares (representing around 4% of his stake).

That occurred on 8th April and sent the company’s shares down around 14% – and they haven’t quite recovered (still down some 10% from the last trading session before Mr Ashley’s move).

Sports Direct’s new bonus plans

The company has certainly changed tactic with this new proposal – to be put forth to shareholders at the company’s next General Meeting (scheduled for 2nd July).

For starters, the bonus package is no longer just for Mr Ashley; instead, the new bonus scheme is set out for “all eligible employees (including executive directors) who meet the qualifying conditions”.

Additionally, Sports Direct’s new performance targets are now based on a longer time horizon.

Here they are…

Sports Direct proposes to dole out up to 25 million ordinary shares to all eligible employees provided the company achieves the following: EBITDA of £480m in 2016; EBITDA of £570m in 2017; EBITDA of £650m in 2018; and EBITDA of £750m in 2019.

If the company meets all of those targets, then 25% of any award would vest in 2019, and the remaining 75% in 2021.

There’s no denying that its targets are impressive: for context, the company’s fiscal 2014 EBITDA guidance is £310m, before a charge for bonus share schemes.

That said, it could be argued that they might be a bit of a stretch – given the longer outlook and therefore greater uncertainties that come along with that. But unlike before, a net debt to EBITDA ratio target is nowhere to be seen in this proposal.

That means that embarking on acquisitions as a means of realising its objectives isn’t beyond the realms of possibility. Sports Direct has a new four-year credit facility with a debt covenant (agreement between it and its lenders) stipulating a net debt to EBITDA ratio of no more than 2.5x – that’s plenty of headroom.

Indeed, shareholders could be hard-pressed coming up with reason not to support the bonus scheme this time (never mind risking further offloads by Mr Ashley).

Of course, of importance here is that the company seems poised to deliver sustained decent growth into the medium term – that’s reason to be upbeat.

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