Turnover and Cost of Sales
Looking at the results in detail, turnover increased by 20% compared to 2019 (and is up by 43% since 2017 (the point at which Radrizzani took charge more or less). This has been driven by strong increases in revenue across the board, but particularly by improving the club’s revenue streams. 59% of the total increase of £8.2m in turnover has been driven by increasing Other Commercial Revenue (up 25%) and merchandising income (up 41%), with a further 16.5% driven by improvements in gate receipts (up 12% driven by higher attendances).
This is all very positive and points to the benefits of a well run club offering an attractive product for fans. It also highlights the benefits of investing in the broader infrastructure of the club to improve revenues, something which was significantly lacking during the Cellino era.
Cost of Sales has increased by a further 20% over the period, tracking in-line with the revenue growth and largely to be expected. This results in a gross profit of £38.95m equating to a 20% increase on 2018 and a 36% increase from 2017, highlighting the improvements in the club both on and off the field.
Wages
The majority of administrative expenses (61%) is driven by the wage bill, and this has seen significant growth in 2019, increasing by 47% over the period through an increase in the salary cap at Elland Road alongside the arrival of Marcelo Bielsa at a considerable cost. Wages at Leeds have increased significantly from 2017 with growth of 123% (or an increase of £25.4m). This will take the club from one of the lowest wage bills, towards one of the highest which would be commensurate with a club challenging for promotion. The club’s wage to turnover ratio has increased from 61% in 2017 to 94% in 2019 which is high, but likely to still be tracking below the Championship average, which was 115% for 2018. The wage bill is likely to have risen further in 2019/2020 given further squad investment and therefore will be tracking likely higher and therefore north of 100%.
What does this mean in practice? This will put significant strain on the requirement of Radrizzani to fund the team given the overall running costs outstrip revenue, and equally will mean that FFP is a key consideration. It also means that Leeds are spending at a level which should make them competitive in the Championship, which hasn’t been the case under Bates, GFH or Cellino. The likelihood of being able to sustain these levels over a long period however is doubtful and it also points to the requirement for player sales if the club is unable to secure promotion this season in order to balance the books to a degree.
Operating losses (ie the true financial picture of the club prior to player sales and interest costs) have also grown significantly from £20.7m to £36.15m over the period (or 75%). This has increased by a whopping 296% since 2017 when operating losses were £9.1m and highlight the reliance of Leeds on the support of the owner.
Debt
Looking at the balance sheet, the intra-group creditors (ie money owed to other group entities) has increased by £18.4m over the period which is represented by 4 loans with 2 due for repayment by 31st August 2018 (and which were not repaid). Interest is accruing on the balance, and the rates are set on an “arms length” basis which effectively allows companies to inject capital into other group companies on a tax efficient basis as any interest cost can be offset for tax purposes.
Per the accounts, £22.79m of loans were taken out in 2019 from other group entities and £5.1m was repaid, equating to a net increase of £17.7m.
There also remains a loan outstanding to a former shareholder (likely GFH) with an outstanding financial liability of £4.28m. This is repayable through to August 2029 and reflects the last part of the GFH legacy on the books.
Summary
So what does this all mean in practice? A few key themes can be brought out from this, namely:
Investment in the club infrastructure is bearing fruit: One of the key changes from Cellino to Radrizzani (amongst many) has been the focus on investment in the club’s infrastructure. By improving merchandise, investing in the website and growing commercial revenue streams such as sponsorship, the club has seen a significant increase in revenue. This however is correlated with performance on the pitch, with a high performing team drawing fans back to the club. Regardless of what happens for 2020, ensuring that this is sustained is going to be key for the club to remain competitive.
Growth in revenue has been massive, but this trend is unlikely to continue going forward, and will likely taper off in the short term if the club remain in the Championship.
Club is now punching at its weight in terms of squad investment: The increase in wages highlight a club which is now seeking to compete at the upper end of the Championship, and using its financial position (driven by an increase in turnover) to maximise its position. As can be seen however, the sustainability of this over the medium term has to be questioned, as it is dependent on owner support and towing the line with FFP. What it does further highlight is that even a club which is very well run, with one of the largest fan bases and most likely the largest turnover (post-parachute payments) is struggling to maintain a competitive spend on its squad. How sustainable that is over the medium term for the Championship as a whole has to be in question, and you may start seeing more of a separation between the teams funded through legacy parachute payments and the Championship stalwarts in terms of promotion prospects as the financial gap becomes even more ingrained.
Sustainability of financial support: As highlighted above, £17.7m of loans were advanced to Leeds from Radrizzani over the period, highlighting the significant investment into the club. £11m of this is likely to have been the proceeds from the share sale to the 49ers which occurred shortly after the 2018 financial year end, but in taking on the broader liabilities in terms of wages, it does demonstrate that significant investment is being made in the club in order to challenge effectively. Risk remains as to how long this level of support can be sustained, and equally will bring player sales back into focus should we not get promoted this summer. Maintaining that equilibrium between a competitive squad and balancing the books will be even more important if we don’t go up this summer.
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