Sports Direct first-half profits slump 67%

Despite claims by chief executive Mike Ashley that Sports Direct's elevation strategy is delivering a "spectacular trading performance", shares in the retailer slumped on Thursday as investors reacted to a 67% drop in pre-tax profit.

In the 26 weeks to 29 October, reported pre-tax profit fell to £45.8m from £140.2m in the same period a year ago, while revenue edged up 4.7% to £1.7bn. Excluding acquisitions, disposals and on a currency neutral basis, revenue increased by 1.2%.

However, UK sports retail revenue was down 1% to £1.1bn due to reduced online promotional activity and store closures as part of the continued elevation of the portfolio.

On an underlying basis, pre-tax profit was up 23% to £88m, while underlying earnings before interest, taxes, depreciation and amortisation were up 7.4% to £156.1m. Meanwhile, group gross margin in the period was down by 180 basis points, with margin in UK sports retail down 80 basis points.

Chief executive Mike Ashley said: "Our high street elevation strategy is currently delivering spectacular trading performance within our flagship stores. We intend to open between 10 and 20 new flagship stores next year.

"Whilst our reported profit before tax has been impacted by fair value adjustments and transitional factors such as the disposal of assets in FY17; our underlying profit before tax remains healthy. We will continue to invest for the long-term and our net debt has increased in line with management expectations."

The group said it continues to anticipate that growth in underlying EBITDA during FY18 will be within its forecast range of 5% to 15%.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “Sports Direct’s corporate governance practices continue to attract headlines for all the wrong reasons, with independent shareholders rejecting an £11m payment to Mike Ashley’s brother on Wednesday.

"Unfortunately the lack of transparency also stretches to the 'Selfridges of Sport' initiative. Mike Ashley has described trading at the new format stores as 'spectacular', but it’s difficult to see evidence of that in the numbers. Improved profits are being driven by cost cuts rather than sales growth - which is actually negative in the UK.

"The tail of strategic stakes and small regional operations continues to grow. At a time when the company is undertaking a major revamp of its core UK operations it’s difficult to imagine that this isn’t a distraction for management.”

Mike van Dulken, head of research at Accendo Markets, said: "The big man may well claim the current strategy is delivering spectacular trading performance, with profits +23% on revenues +4.7%, implying healthy margin expansion. However this is only true once you adjust for all manner of things. Like excluding gains from FX moves and property sales, and ignoring more significant losses from fair value adjustments to unhedged FX forwards and options contracts, losses on strategic investments and fair value movements on derivatives. All of which aren’t truly exceptional, also present in the first half of last year."

On Wednesday, Sports Direct shareholders rejected the company's proposed payout to founder Mike Ashley's brother for his work as an IT expert. Results of a general meeting revealed that 70.7% of shareholders voted against the payout.

"The board trusts that shareholders will welcome the steps taken to reassure them that John Ashley did not benefit inappropriately from being the brother of majority shareholder Mike Ashley. In fact, John was actually disadvantaged by approximately £11m after he forewent bonuses that he would have received if he were treated equally to other executives who helped to build the company."

At 0910 GMT, the shares were down 7% to 357.60p.