A recent rally at Mike Ashley’s Sports Direct International (SPD) is halted on news the company’s stake in Debenhams (DEB) has triggered a slump in annual reported profits, sending the shares 10.3% lower to 391.2p.
There are positives in today’s numbers, which on an underlying basis come in at the top end of the expectations maverick owner Mike Ashley mentioned in last year’s outlook statement and lend Shirebrook-headquartered Sports Direct just enough confidence to upgrade current year earnings guidance to boot.
DEBENHAMS STAKE DISASTER
The sporting goods giant’s results for the year ended 29 April reveal a 72.5% drop in reported profit before tax (PBT) to £77.5m after an £85.4m loss from its 29.7% stake in ailing department store Debenhams, a strategic investment which has cost Ashley & co big time, shares in the British heritage brand having collapsed following a string of profit warnings.
Besides Debenhams - the stake sits just below the 30% threshold that would mandate a formal takeover bid - Sports Direct boasts a slew of potentially distracting strategic investments in other companies. They include House of Fraser, Goals Soccer Centres (GOAL:AIM), GAME Digital (GMD), French Connection (FCCN), Findel (FDL) and MySale (MYSL:AIM), not to mention Iconix Brand in the US, providing extra ammunition for Ashley’s critics.
‘Strategic investments are an integral part of the group’s overall strategy,’ counters Sports Direct today. ‘Against a backdrop of a challenged retail market, we believe innovative strategic partnerships will help to differentiate our offer and enhance the consumer experience.
'We look for ways to extend our reach into new retail channels and geographies, as well as selectively grow our market share.
'We maintain an active dialogue with the management teams of each of our investments, continually looking to explore new ways of working together. Given the breadth of our business, the strategic benefits can be varied and extensive.’
Yet Russ Mould, investment director at AJ Bell, argues: ‘A big slump in annual profit at Sports Direct suggests the business should stick to its core skills rather than engaging in speculative investments in the retail sector.
‘Sports Direct, which has invested in several high street peers over the years, began building up a stake in troubled department store Debenhams in 2017 and holds a near-30% stake. It has been punished with a £85m hit following a collapse in the Debenhams share price.’
ELEVATION STRATEGY BEGINS TO SCORE
Given the well-documented woes of the UK high street, a 2% drop in UK Sports Retail sales to £2.182bn comes as no surprise and Sports Direct’s European Sports Retail sales are down 0.1% to £637.2m, although Premium Lifestyle revenue (including the Flannels, Cruise and van mildert fascias) surged 42.7% higher driven by online sales and an increased store portfolio.
Encouragingly, underlying PBT grew 34.5% to a forecast-busting £152.9m, thanks to success with the ‘elevation’ strategy, under which Sports Direct is opening bigger and better stores, thereby strengthening relationships with third party brands Nike, Adidas, Puma and Under Armour, and upgrading its websites.
Major shareholder and CEO Ashley is pleased ‘that our underlying EBITDA has come in at the top end of our expected range at £306.1m as we indicated this time last year, and also that the underlying profit after tax has increased substantially to £104.9m.’
Meanwhile, Sports Direct’s head of elevation Michael Murray insists ‘the elevation strategy continues to exceed expectations. As the property pipeline and brand relationships accelerate, we are confident in achieving between a 5% and 15% improvement in Underlying EBITDA for the coming financial period.’
Liberum Capital upgrades its rating from ‘hold’ to ‘buy’ and increases its price target from 400p to 520p. ‘This reflects our growing confidence in the group’s growth prospects following today’s results,’ says the broker, ‘including the outperformance in full year 2018 versus expectations, raised guidance for full year 2019 driving our upgrade and ongoing delivery against the group “Elevation” strategy.'
