Under pressure UK high streets are not a comfortable place to be for many retailers and Sports Direct (SPD) is suffering.

While headline sales growth of 4.7%, to a little more than £1.71bn for the 26 weeks to 29 October, looks reasonable enough, there's serious pressure on profits. Reported pre-tax profits crashed 67% in the period to £45.8m as the sports goods retailer cuts costs and tries to shake-up its pile 'em high, sell 'em cheap image.

BUSINESS RETHINK

Chief executive Mike Ashley wants the business to become the ‘Selfridges’ of sports, taking the chain upmarket. Hence a series of underperforming store closures and fewer online promotions, but it's taking a heavy toll on profit margins.

Canaccord Genuity analyst Sanjay Vidyarthi calculates an 80 basis points drop in gross profit margins in the UK part of the business alone. Then there's £300m of cost cutting.

Across the whole group, which also has shops across Europe and in parts of the Far East, gross margins fell 180 basis points, or from 40.4% to 38.6%.

EARNINGS COLLAPSE

Even after stripping out the litany of exceptional costs, earnings before interest, tax, depreciation and amortisation (EBITDA) of £156.1m still missed expectations of £159m.

The effect on the bottom line is enormous, slashing earnings per share from 15.6p to 4.9p.

There's also a huge jump in net debt for investors to consider, which went from £182.1m to £471.7m. Little wonder the Sports Direct share price is firmly lower today, down 4.4% at 366.5p, having been off by around 10% in early trading.

Canaccord's Vidyarthi remains concerned by what he sees as a high-risk strategy that the company is pursuing, with little evidence to date that it will work.

Many investors clearly share these doubts.

 


Issue Date: 14 Dec 2017