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Sports Direct wobbles at the half year

The controversial retailer reported a plunge in half-year pre-tax profit, but are things really as bad as the market suggest?
December 14, 2017

Far be it for us to jump to the defence of controversial retailer Sports Direct (SPD), but did the market overreact to this 67 per cent crash in pre-tax profit for the first half? The market sent the shares down 8 per cent on results day before climbing back to parity. A £146m profit on disposal of JD Sports' (JD.) shares in the prior year explains that drop. Investment income came in at just £0.2m this time around, and if the playing field is levelled, then profits actually rose by more than a fifth.

IC TIP: Hold at 382p

But that doesn’t mean there isn’t cause for concern. Investment is on the rise – as is net debt – as the group tries to reposition its brand and UK sales are suffering amid a difficult consumer climate. Public relations distractions continue: John Ashley lost out in his pursuit of an extra £11m in owed salary – something Sports Direct investors categorically vetoed at a meeting the day before the release of these results.  

On closer inspection, half-year revenue at the core UK sports retail business fell 1.4 per cent to £1.12bn, while gross margins slipped from 40.2 per cent to 39.4 per cent. Reduced online promotional activity and store closures weighed on the top line, and additional stock provisions and adverse exchange rates watered down the margin. As a result, gross profit was down 3.4 per cent to £441m.

Internationally – where the group earns around a fifth of its revenue – sales rose by a healthier 4 per cent which, along with a clear improvement in gross margins, helped the division move into the black at the underlying cash profit line, delivering £15.6m compared with a £10.7m loss this time last year. Of course, the performance overseas was largely helped by the exchange rate environment. Neutralising the effect between the euro and the pound meant sales actually fell 0.8 per cent, due mainly to store closures.

Analysts at Liberum expect pre-tax profit of £124m for the year ending April 2018, giving EPS of 15.7p, compared with £114m and 11.4p in FY2017.

SPORTS DIRECT (SPD)   
ORD PRICE:382pMARKET VALUE:£2.07bn
TOUCH:381.8-371.2p12-MONTH HIGH:424pLOW: 267p
DIVIDEND YIELD:nilPE RATIO:13
NET ASSET VALUE:235pNET DEBT:37%
Half-year to 29 OctTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20161.6414015.6nil
20171.7145.84.9nil
% change+5-67-69-
Ex-div:na   
Payment:na