Saturday, 5 March 2016

2015 Accounts - The Downward Spiral Continues

After a bullish statement on the upturn in the financial performance of Leeds United being published by the club prior to their release, the accounts for 2015 make an intriguing read. Whilst this blogger is somewhat skeptical of Massimo Cellino's ownership of the club,  the headlines of a reduction in net losses to 2m versus a loss of 22.9m in 2014 had to be applauded, as should be the reduction in cost of sales from 6.2m to 3.9m. The true financial position of the club however is a bit more nuanced, and the ability to get to that P&L position is driven by one-off elements which flatter the underlying financial position of the club.

Starting firstly with the profit and loss statement, the turnover has continued to decline, with a drop of 3.4% for 2015. This has been driven by a decline in merchandising income of ca. 750k which was partially offset by an increase in gate receipts of 200k. The continuing drop in the turnover (down 25% since 2011 and now rapidly approaching the Bates League 1 nadir of 2008 and 2009 of ca. 23m). Given average attendances are down again this year, it is unlikely that the turnover position will have improved, and the somewhat kneejerk reactions (such as the pie tax) could well be a reaction to shore up a declining turnover position.

This has been partially offset by the decrease in cost of sales, and the gross profit position is better than last year, however it is still the worst position since 2009, when Leeds were in League 1.

The administrative expenses remain high, especially in the context of a club generating a gross profit of ca. 20.5m. Whilst these have dropped 10%, driven by ca. 2.4m reduction in the overall wage bill (500k of which relates to director remuneration), they are still 40% higher than in 2010 when turnover was 3m higher than today. Ultimately the operating loss position of 12.64m is unsustainable in the long term, and whilst an improvement on the previous year, it is still not a stabilized platform for growth.

Ultimately, therefore how do you square the circle? It remains clear that both the turnover is too low and the administrative costs are too high. Whilst the wage bill has increased, few fans will argue that the overarching squad and wider coaching staff are sufficiently resourced to mount a comprehensive promotion challenge, therefore if we say that the wage bill is at or around the correct level, we would need to reduce other costs, namely the significant rental outflows which act as a significant drag on expenses. Ultimately this needs to be coupled by a boost to turnover, and Leeds should be able to get back to gross revenue of ca. 32.6m which we saw in 2010. In order to do this we need attendances up, and more spend on merchandising revenue. This requires a club able to mount a promotion challenge, or at the very least one with a coherent medium term strategy for getting there. The current lack of direction with the club will continue to bleed attendances and put further pressure on administrative costs. This ultimately risks sending the club into a death spiral of cost cutting to meet declining turnover and risks threatening the financial stability of the club.

The balance sheet position of the club has improved substantially, driven by a conversion of 11.6m of debt to equity over the year. In addition, a further 4.9m of equity was invested into the club over 2015. It is clear from the financial position of the accounts (and the cashflow position) that Leeds remain reliant on Massimo Cellino to provide cashflow support to the club. The position has also been helped by net player profits of 9.8m over the course of 2015 which has significantly improved the overall loss position. This however isn't a sustainable source of revenue and the operating position of the club can't rely upon this to provide support over the long term, not least because as mentioned above, the sale of our best players make it increasingly difficult to mount a promotion challenge and ultimately lead to further pressure on attendances and turnover.

Ultimately whilst there have been some small improvements in the financial position, the continued decline in turnover represents the biggest threat to Leeds United. as has been mentioned before, a medium term strategy in terms of a promotion challenge, investment in and retention of the players able to mount a successful challenge and a long term coaching plan are required to stabilize the club. Without this, any owner will be forced to keep funding cashflow shortfalls for the club, and the club risks long term decline with the threat of administration and relegation. Time will tell whether either Massimo Cellino or any subsequent owner appreciate this and take the steps necessary to ensure the long term stability of Leeds United.

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