Edmond Jackson's Stockwatch: Sports Direct International

What to make of the FTSE 250 shares in Sports Direct International, the UK's leading sports retailer, after founder Mike Ashley sold 25 million shares at 400p?

Ashley retains 385.4 million shares, or 64.4%, and some investors may welcome the reduction of his controlling stake. It is also true that Ashley is an astute trader - he also sold down in the 2007 flotation, after which the shares crashed. Not to imply the same thing will happen, but this latest sale is likely the maximum possible in one go, and Sports Direct shares have had a very good run up to 240p.

The sale follows strong performance in the company's third quarter, sustaining key growth metrics over 20% as cited at last December's interims.

Sports Direct is prospering in the cash-strained consumer environment via adept sourcing, effective online sales, a lucrative staff bonus scheme and European expansion. At about 420p a share currently the forward price/earnings multiple looks about 17 falling to nearly 14 times, although Sports Direct can sustain a growth rating if it continues to distinguish itself among retailers.

A note disclaims the latest figures benefit from 20 stores acquired from the administrator of JJB Sports on 1 October - these will be included in the group's prelims within "UK Wholesale and other" until the clearance of acquired stock is complete. But I have repeatedly noticed ex-JJB stock being sold via Sports Direct outlets, sometimes with a "liquidation sale" sign and another next to it assuring this particular store isn't closing.

So I question how some of the JJB stock is being accounted for, unless each Sports Direct store has been painstakingly able to report separately for it. Anyway for the medium to longer term Sports Direct should gain market share from JJB's demise.

I would therefore be wary of assuming growth rates in the order of 20% plus in the near term; and Ashley has sold into this impression. Sports Direct also enjoyed a series of boosters last year - the Euro 2012 football championship, Olympics then JJB deal - and there are not such major sporting events this year. The shares may therefore consolidate if future updates soften the revenue growth profile. Yet the latest acquisition, of Republic fashion retailing, shows management alert to every opportunity in this recession - a period when self improvement thrives - and customers will seek discount sports gear as a means to relatively low-cost recreation. By the time of economic recovery, Sports Direct will be in a very strong market position.

Last December's interims cited openings in four new European countries although international retail grew only at about half the UK rate, by 11.4% to £90.6 million in context of £1,088.9 million overall revenue. So Sports Direct has plenty of scope to extend its formula in Europe, where consumers are constrained by austerity policies in support of the euro. The aim is to expand into all 17 countries that have adopted the euro within five years.

Comparing prices online I have generally found Sports Direct and its subsidiary Field & Trek able to match or undercut the lowest prices available and a growing reputation for this will also serve the group well. Interims showed online sales growth of 54% to represent 12.5% of the total. It points to well-established low-cost sourcing, a key retailing skill when sports gear is still discretionary buying for most people; also effective vertical integration of manufactured brands such as Dunlop, Slazenger and Karrimor; and the expansion of a national distribution centre in Shirebrook which will continue through 2014.

Recent progress in a difficult consumer environment also underlines a break with Sports Direct's post-flotation warnings in 2007; and as you can see from the five-year record, slippage of sorts in the years ending 2009 and 2011; all of which lent the impression that Sports Direct was vulnerable to falls in consumer spending, hence a modest rating should apply. The perception is now reversed: that it is in just such hard times the business can thrive and gain share.

The progress has also been helped by an enterprising, equity-related bonus scheme for employees introduced in the 2010/11 financial year, meaning some shop staff qualified for bonuses in the order of £50,000 value; although there has been resistance to the extent of share bonus the board proposed for Ashley.

His ownership of Newcastle United is an opportunity in terms of extending the Sports Direct image - assuming the club is successful - and a potential risk in terms of distraction. Alan Sugar, a similar buccaneer, once remarked that his involvement with Tottenham Hotspur was "my single biggest mistake".

A return to dividends with a progressive payout is forecast, which although only representing a 2% prospective yield does at least emphasise cash returns after the last two years' capital investment. It appears Sports Direct wants to normalise its image as a public company prioritising shareholder returns.

Ashley's 25 million shares have most likely been placed with institutions hungry for a slice of the action, so a fair trade all round. While the long run remains promising I would just be cautious of recent growth rates continuing in the near term and that a master trader knows when to book profits.

For more information see sportsdirect.com.