Mike Ashley, the controversial billionaire owner of Sports Direct PLC (LON:SPD) today admitted that “the last six months have been tough for our people and performance” as the retailer reported a 57% slump in first half profits.
After a period in which Ashley and the group has been blasted by the press and Parliament for the treatment of its workers and been battered by the fall in the value of the pound after the Brexit vote, the sports goods stores firm saw its underlying pre-tax profit drop to £76.3mln for the 26 weeks to October 23.
Group sales over the period rose by 4.2% on a currency neutral basis, with revenue from its UK Sports Retail operations up 5.6%, but profits were hit by a big deterioration in its gross margin as a result of the devaluation of sterling.
George Salmon, Equity Analyst at Hargreaves Lansdown, said: “The eye-catching number is the 610 bps fall in UK margins, primarily driven by adverse currency movements over the half.
“While hedges are now in place for 2017, the group was unhedged going into the period. The sharp drop in sterling therefore caused a real-time hit to the group’s buying position.”
Sports Direct warned that it expects “existing strategic challenges and currency headwinds facing the Group to continue to adversely impact financial performance over the medium term.”
Sports Direct, which is 56% owned by Ashley, was sharply criticised by MPs in July for what they called "appalling" working conditions at its main warehouse at Shirebrook.
This led the company to launch an independent review which found "serious shortcomings" in practices at Shirebrook, which it is currently taking steps to tackle.
In reaction to today’s results, the group’s shares dropped 7% in early morning trading, down 22.1p to 292.8p. Sports Direct’s share price has more than halved in the last 12 months.
Ashley, who took over as the firm’s chief executive after long-time incumbent Dave Forsey resigned in September, said : "Our UK Sports Retail business continues to be the engine of Sports Direct, but our results have been affected by the significant deterioration in exchange rates, and our assessment of our risk relating to our stock levels and European stores performance.”
He added: “We continue to elevate our sports retail proposition for our key third party brand partners and customers, as we progress towards our medium to long term goal of becoming the ‘Selfridges’ of sports retail.”
In a client note this morning, analysts at Liberum Capital said: “After a troubled year with trading and corporate governance pressures facing the company today's H1 update is bearish in tone (PBT down 57%, GM down 450 bps) but the bad news is already well known.”
They added: “H1 sales look solid, up 5.6% underlying in UK Sports Retail. H1 PBT of £72m suggests our FY forecast of £137m is well within reach.”
And they said: “On the positive side SPD has appointed a new non-exec with an eye to succession planning which should please investors.”
Sports Direct has appointed David Brayshaw, a Senior investment and commercial banker, as a non-executive director and member of the company's Audit Committee with immediate effect.
Neil Wilson, Senior Market Analyst at ETX Capital, said that “if chairman Keith Hellawell does eventually go on January 5th and someone like independent director David Brayshaw steps in, then we might see investors warm a little more to the stock and this could be the nadir.”
A majority of independent investors voted against Mr Hellawell’s reappointment and as a result, he has to stand for re-election in January.
However, he continues to have majority shareholder and founder Mr Ashley’s backing and so it is unlikely he will be voted out.
- updates with additional broker comment -