Analysts question Sports Direct positivity after earnings slump

British retailer Sports Direct has reported a 29% slump in full-year earnings after failing to hedge against a weaker pound, but its shares rose on a forecast of growth this year and hopes management was getting its house in order.

The sportswear chain, founded and run by billionaire Mike Ashley, was badly caught out by the fall in the pound after Britain’s vote to leave the EU in June last year as it sources most of its products from Asia priced in dollars.

Having failed to offset the risk of currency fluctuations for its 2016-17 financial year, the company put a hedge in place after the Brexit vote but that backfired too. It said it had now minimised the short-term impact of currency swings but remained exposed to fluctuations in the medium and long term.

However, Mr Ashley, who owns 62% of Sports Direct’s equity and aims to make the group the “Selfridges of sport”, said he was encouraged by better-than-expected trading from a new generation of flagship stores designed to showcase brands such as Adidas and Nike.

Sports Direct, which is still battling criticism of its treatment of workers and corporate governance, said its outlook was “optimistic” and it was targeting growth in underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) of 5%-15% in the current 2017-18 year.

“The outlook statement is miles ahead of expectations — management sees growth in EBITDA next year where we’d seen a decline,” said analysts at Peel Hunt, who have an “add” rating on the stock.

“We are eager to know how Sports Direct can shift the focus of its range from own label product (50-60% gross margin) to third party (circa 30% gross) without impacting margins,” the analysts said.

Sports Direct made underlying EBITDA of £272.7m (€307m) in the year to the end of April — ahead of forecast, but well below the £381.4m it made in the previous year.

Revenue increased 11.7% to £3.25bn but underlying pre-tax profit crashed 59% to £113.7m, reflecting both the currency movements and higher depreciation charges.

Reuters


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