Five-a-side operator Goals Soccer Centre (LON:GOAL) today issued a second profit warning in the space of half a year, guiding adjusted profits for the year lower ahead of the publication of results. This has been a tough, but not disastrous year for shareholders: the company seems to have put out bad news setting out a share price fall, only for it to recover ahead of the next bit of bad news:
As we can see, today’s share price warning only puts it back to roughly the same level as it was in July when the last profit warning was made. Back then on 19 July the share price hit a low of 62.5p in the first hour of trade. Today’s share price fall is significant but lower in magnitude as many of the factors were known already.
Goals is an interesting business. Originally the founder Keith Rogers was behind a small 5-a-side centre which was bought out and rebranded as Powerleague. Rogers then restarted another similar business, which is today known as Goals Soccer Centres. They have expanded to 46 locations in the UK and together with a joint venture partner have expanded into the USA to take advantage of the rising popularity of football.
Goals have not been a great investment for shareholders in recent times although had enjoyed a very good record of profits. The historic issues related to debt which was taken on to expand the number of sites it has. In recent years the level has come down but today’s report suggests it might become a significant problem.
The warning hits in a trading update today. We get straight into it:
Underlying sales(1) for the year ended 31 December 2018 rose +0.5% to £32.4m (2017: £32.2m), with positive growth in H2, reflecting the success of the further arena investment. This follows a weak first half, impacted by adverse weather conditions. Underlying sales(1) grew approximately 4% in H2, predominately as a result of the benefits of the investment programme being realised, with 39 of our 46 UK clubs now operating with five or more pitches upgraded.
This is to be expected with ‘beast from the east’ hitting large parts of the country in H1 this year, possibly balanced out with England’s progress in the World Cup.
It seems that new products come with costs:
Whilst costs on the core football product have been tightly controlled, the introduction of the ancillary food and beverage and children’s birthday party enhancements has led to materially higher initial cost of sales in these areas, resulting in a decline in Group profitability in H2 of £0.3m and an overall reduction in Gross Profit of 3%. In addition, labour costs increased by £0.3m (8%) and other costs increased by £0.2m partly driven by the increased staffing requirements in these areas. Mitigating measures were implemented at the end of Q4 to reduce these increased costs. Since December, the new pricing, product offering, and staffing requirements have been reviewed and a new stock management system is now in place to provide more effective management in this area of the business, ensuring costs are properly controlled going forward.
A large increase in exceptionals:
Goals anticipates that exceptional costs for the year ended 31 December 2018 will be approximately £5.5m (H1 £2.7m, H2 £2.8m) comprising of non-cash asset impairments of £4.6m and restructuring costs of £0.9m. The non-cash impairments primarily relate to reductions in the carrying value of 3 clubs and the previously announced sale of our Beckenham North club to Crystal Palace Football Club for use in a non-competing activity.
Whilst exceptional costs will not affect their profit measure, this is down for other reasons:
Whilst we have seen positive growth in football and other revenues in H2, the outturn for 2018 is disappointing and has been impacted by both the lower margin in ancillary activities and the slower-than-anticipated growth rates in the US. Goals therefore expects full year Group Adjusted Profit for 2018 of between £4.3m to £4.5m.
And the dreaded comment about covenants:
Net debt at the year-end was approximately £29m. Goals has agreed with its lenders to amend its Net Debt/EBITDA covenant from 3.0x to 3.4x at 31 December 2018 and is at an advanced stage of discussions to amend the quarterly tests in March and June 2019 to 3.25x to provide additional headroom after which the covenant will reduce back to 3.0x. It is anticipated that during 2019, considerable headroom will be generated.
Goals have been battling a sterile market for a few years now. Pricing of the product is difficult. In an area with competitors (for example Powerleague or even council-funded facilities) it is quite hard to differentiate; players simply want a pitch and perhaps some facilities. New players like schools have also found that if they are in the right location they could earn some extra money from renting their facilities as well.
Revenue growth has been stagnant:
Although having said this, they are doing it profitably, and with a good margin to boot: in 2016, underlying profit before tax was £7.7m, and in 2018 this reduced to £6.2m. The comparison as given in the trading update is therefore a fairly large fall in profits.
With these kind of margins we might wonder where all the cash is going. In both 2018 and 2017 a large amount of cash was spent on property, plant, equipment, in other words upgrading their locations, which was in excess of the cash coming in. In 2017 a placing of almost 10% of the company raised funds to help this and pay the debt down, in the last year the loans increased to pay for this.
These costs are set to continue. In the last report it was demonstrated that upgraded pitches earned more money, but non-upgraded ones were showing like-for-like declines. And roughly just over half of the pitches had been upgraded at that time. Some of the other projects to upgrade centres are not cheap as well, including building improved catering and leisure facilities.
Debt continues to be a worry, although the global reduction in interest rates has benefited the company greatly, as payments under its previous arrangement were costing it over £2m a year in finance charges alone. Dividends used to be paid, but ceased in 2015, a sensible move from the board. With an issue of shares only 2 years ago it seems that an attempt to tap the markets for more could be a move, seeing as much of the previous issue did not go towards the expenditure needed. For sure increasing debt is a no-no.
The covenant comments make me nervous, as it was obviously done because Goals would have come close to (or would have) failed them otherwise. The comment about making significant headroom reads to me that money will be paid into reducing the liability here, which would improve the ratio.
Despite initial appearances I do think the business is quite capex-hungry at present. Competition from local authorities would be significant (who could afford to undercut by a lot), and therefore to differentiate themselves better facilities have to be provided. That would mean the latest quality pitches, and in some cases a sports bar/restaurant on-site. This is demonstrably being done in some places, but the improvement program is not yet complete and still requires further funding. With the average life of one of their pitches being 4 years it may be the case that as soon as every arena is upgraded, it would become necessary to update again.
As the profit warning implies today many of the new product offerings such as kids parties come with increased costs, which then has an effect on profit. Not that this may be wrong: any moves to reduce the amount of slack would be welcome. I would guess that for the majority of Goals centres, demand would be very high at certain times (the peak period after work) and non-existent at other times (during the day). On this front I don’t think they are doing badly but it is a fact that demand would be extremely thin.
This was rated at 2/5 on the original warning, I would still rate this at 2/5 today as the price of shares are the same. Sailing so close to the covenants is a bit dangerous, and a repeat of bad weather could really put things at risk. That being said, people are not going to stop playing football overnight and there will always be demand for a good product.