Sports Direct International plc (LON:SPD) chief executive Mike Ashley has repeated his belief that the retailer is on course to become the “Selfridges of sport" following an acquisition frenzy as it reported a 58.7% drop in full year pre-tax profit.
Underlying pre-tax profit for the year to 30 April 2017 was £113.7mln, compared to £275.2mln in the previous year, dragged down by a weaker pound against the dollar.
“We have put in place hedging arrangements to minimise the short-term impact of currency volatility, but like many UK retailers we remain exposed to medium / long term currency fluctuations,” Ashley said.
Underlying earnings (EBITDA) dropped 8.5% to £272.7mln from £381.4mln but Sports Direct said it expects EBIDTA growth of 5-15% in fiscal year 2018.
Shares rose 7.32% to 322.70p in morning trading on the forecast for a return to EBITDA growth.
"However, we will continue to be conservative in managing for the medium to long term, which may result in short-term fluctuations in underlying EBITDA, particularly given the continued uncertainty surrounding Brexit," Ashely said.
The slump in the pound since the UK voted to leave the European Union also hurt margins. Gross margins dropped 320 basis points to 41.0%.
Operating costs grew 16.9% to £1.1bn, due the impact of higher onerous lease provisions across Europe following a review of poorly performing stores where the stronger dollar dented margins.
Revenue continued to grow, however, rising 11.7% to £3.2bn from 32.9bn. This included 6.3% growth in UK sales and a 38% increase in international sales.
Sports Direct expands with acquisition frenzy
The company has been expanding its portfolio, having bought 50 stores in the US under the Bob’s Stores and Eastern Mountain Stores brands. Last week it announced it was buying a 25% stake in struggling video games retailer Game Digital PLC. (LON:GMD).
Sports Direct, which also has stakes in French Connection (LON:FCCN) and department store chain Debenhams(LON:DEBS), Findel PLC (LON:FDL) and JD Sports PLC (LON:JD.), has invested £317mln in property assets with the view to open more stores.
"Sports Direct is on course to become the ‘Selfridges’ of sport by migrating to a new generation of stores to showcase the very best products from our third party brand partners,” Ashley said.
"We have invested over £300mln in property over the last year, and I am pleased to report that early indications show that trading in our new flagship stores is exceeding expectations.”
He also announced a new strategic partnership with Japanese footwear brand Asics, which will take space inside Sports Direct’s flagship stores.
Ashley, the founder of Sports Direct, stepped in as chief executive after the resignation of Dave Forsey late last year.
His full year statement comes in the wake of a legal spat over what he allegedly said at a London pub and reports that he had vomited in a fire place during one boozy meeting.
Sports Direct appoints new CFO
Alongside the results, the group announced the appointment of Jon Kempster as its chief financial officer. Kempster, who was previously finance director at Wincanton, will join the board on11 September.
Liberum raised its rating to ‘buy’ from ‘hold’ and lifted its target price to 380p from 310p, saying there has been a “significant improvement” at the senior management level and positive steps have been made in improving stakeholder engagement across all levels of the group.
“The strategic partnership with (sports equipment company) ASICS, the stake in Game Group and the appointment of a CFO are just three of a larger number of positive steps undertaken,” the broker said.
Sports Direct faces challenging times, says Hargreaves Lansdown
Laith Khalaf, senior analyst at Hargreaves Lansdown, said while the weaker pound decimated the retailer’s margin on sales, much of this was already baked into expectations.
Investors instead have turned their focus on management’s expectations for an increase in earnings next year, Khalaf said.
“Sports Direct still faces challenging times,” the analyst added.
“The retailer is trying to reinvent itself into the Selfridges of sports in the UK, while at the same time launching in the US, and fighting off concerns from shareholders and MPs about corporate governance and working conditions in the UK.
“All this while the weak pound is increasing costs, and the British consumer is facing rising inflation and weak wage growth, not a pretty combination for the price-sensitive shoppers who turn to Sports Direct for a bargain.”