Shares in Mike Ashley-controlled Sports Direct International (SPD) topped the FTSE All-Share leader board on Monday, sprinting 22% higher to 439.8p after the trainers-to-tennis rackets retailer reported a bumper 58% rise in first half profits.

This was good going given testing conditions on the UK high street. Investors were also heartened by guidance for 5%-to-15% growth in underlying earnings before interest, taxation, depreciation and amortisation (EBITDA) for the year ending 26 April 2020, giving a range of between £356.4m to £390.3m.

Liberum Capital raised its annual EBITDA forecast by 23% to £364m and upped its price target from 400p to 550p on the positive outlook.

STRONG FIRST HALF

For the half to 27 October, Sports Direct, where billionaire Newcastle United owner Ashley calls the shots, achieved a 58% rise in underlying pre-tax profit to £101.8m. Net debt halved thanks to strong underlying cash flows and proceeds from the sale and leaseback of the retailer’s sprawling Shirebrook distribution centre.

Group revenue rose 14% to £2bn, although stripping out the acquisitions of GAME Digital and Jack Wills, underlying revenue declined modestly as Sports Direct focused on a so-called “elevation strategy” of shifting to more premium, higher price-point, higher-margin products while rationalising the store estate.

GREEN SHOOTS OF RECOVERY

Investors welcomed reduced losses in the Premium Lifestyle division, where Sports Direct is starting to see ‘the green shoots of recovery’ at acquired department store House of Fraser.

Furthermore, Sports Direct insisted it would not be on the hook for any ‘material liabilities’ arising from a £674m Belgian tax enquiry. According to Ashley, PwC Belgium has confirmed it has ‘found no evidence of any material underpayments of VAT’ by the FTSE 250 retailer.

THE EXPERT’S VIEW

Although the elevation strategy is showing positive signs, not everyone is convinced. Russ Mould, investment director at AJ Bell, commented: ‘Can Sports Direct really elevate itself from the “pile them high, sell them cheap” approach which has characterised Mike Ashley’s retail style to date?

‘Becoming the “Selfridges of sport” will require a different skill set from the one which has helped Ashley go from a single store in Maidenhead in 1982 to today’s retail empire.

‘You can understand the appeal of moving towards the premium end, given the potential for higher margins, but such a move is fraught with risk'.

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‘Ashley will have to walk a tightrope to ensure he does nothing to undermine his premium brands which, after all, are what allow you to charge higher prices for products. He has already attracted some criticism for filling House of Fraser stores with discount goods and sportswear. Once you lose the shoppers prepared to pay for high end goods it could be a tough ask to win them back.’

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Issue Date: 16 Dec 2019