Sports Direct International PLC (LON:SPD) may need to rethink its investments in the retail sector after it was left counting the cost of its stake in troubled department store chain Debenhams last year.
The sportswear retailer holds a 29.7% interest in Debenhams, which has seen its shares fall more than 70% over the past year following a series of profit warnings.
It also has an 11% stake in House of Fraser, which is closing down a number of its stores as part of a turnaround plan.
The struggles at Debenhams and House of Fraser reflect the pressures bricks and mortar retailers have come under from the shift towards online shopping and declining consumer confidence.
Sports Direct 'should stick to its core skills'
Sports Direct took a £85mln hit on its investment in Debenhams last year, sending its profit before tax down 73% to £77.5mln.
“The company has a string of such ‘strategic investments’, which also includes House of Fraser, French Connection and Goals Soccer Centres, and it’s hard to fathom the precise strategy at play here,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.
AJ Bell investment director Russ Mould said the slump in annual profits suggests the company should “stick to its core skills rather than engaging in speculative investments in the retail sector”.
Sports Direct's move upmarket pays off
Beyond these strategic investments, the company’s colourful boss Mike Ashley has been trying to turn Sports Direct into the “Selfridges of Sport” by upgrading stores to attract more top brands like Nike, Adidas and Under Armour.
So far, this move seems to be paying off, with premium lifestyle sales rising 42.7% last year.
Ashley's plan also involves improving the company’s online services and investing in property acquisitions with the aim to open new stores.
READ: Sports Direct shares plunge as profits plummet after taking hit from Debenhams stake
Michael Murray, the partner of Ashley’s daughter and who advises on property transactions for Sports Direct, has been promoted to the role of “head of elevation” to help the chief executive execute his strategy.
“A strengthened senior team, a focused and disciplined strategy that places property and brands at the very centre should result in increased customer loyalty, frequency of visit as merchandising, availability and product lines improve over the next few years,” analysts at Liberum said.
Higher revenues 'commendable', says Liberum
Liberum raised its rating on the stock to ‘buy’ from ‘hold’ and lifted its target price to 520p from 400p.
The broker said the higher revenues Sports Direct delivered last year was a “commendable achievement” given the “heavy lifting” required in taking the business more upmarket and the challenges in the UK retail market.
It added that tight control on costs and benefits from infrastructure investment and automation has started to deliver efficiencies in the UK and Europe, leading to an improvement in operating margins.
Sports Direct reported a 3.5% increase in annual group revenue to £3.6bn as growth in international and premium lifestyle brands divisions offset declines in the UK and Europe.