Sports Direct earnings fall short as Ashley commits to future

In a move likely to further inflame investor views of management's mixed corporate governance record, chairman Keith Hellawell was asked to continue in his role after he offered to step down over the weekend, with the FTSE 250 retailer urging the ex-policeman to remain "in order to assist with making further improvements".

Hellawell later said at a fractious shareholder meeting at the company's headquarters in Shirebrook, Derbyshire that he will step down in 2017 if he has not by then won the support of independent investors.

In the pre-meeting statement Ashley, officially the company's deputy executive chairman but as 55% shareholder an autocratic hand on the tiller, committed to carrying through his strategic plan over the "next two-to-four years" and stressed that he "has no current intention to take the company private, and has indicated his willingness for the company to confirm this statement publicly".

At the meeting itslef Ashley told one union-affiliated questioner "it's probably your fault we're in this mess" as a slanging match threatened to overshadow the efforts to show a more contrite tone, having last night in a concession to governance that ties in with recent proposals from prime minister Theresa May, recommended recruiting a "worker's representative" to the board.

Lowered guidance

However, it's not just governance that has irked investors, with the profit warnings of last and this year followed by another Sports Direct downgrade.

Earnings before interest, tax, depreciation and amortisation (EBITDA) are now expected to hit around £300m, versus the £381.4m in the year to 24 April this year and markedly worse than the analyst consensus of £320m, due to lower gross margins and higher operating costs, while sales are predicted to increase at least 9%.

Group gross margin is expected to decline by "no worse" than 275 basis points from the 44.2% seen in the last full year, while the increase in operating costs should be "no worse than 8%".

A substantial increase in capital expenditure is expected, with investment in the store property portfolio, led by Ashley's son-in-law Michael Murray, seeing around £250m spent on acquisitions since the start of the financial year and plans to spend potentially at least £300m per year using cash resources and a £788m bank facility.

The company feels the investment will be worth it after successes from its initial batch of 'new generation' store openings.

Analysts at RBC Capital Markets said, with the shares being very strong in recent days on improved sentiment due to SPD’s review of its working practices, it expected the shares to give back due to the lower profit guidance.

RBC set a target price of 280p and said it expects profits to continue to fall short, based on the assumption that it will be "challenging for the company to raise prices when consumer disposable incomes are being squeezed".

Broker Cantor Fitzgerald said the debacle over workers rights and pay rates was "a sideshow" as the major surprise was the change in strategy to focus on property development via the purchase of freehold properties and the development of flagship stores.

"It appears the company is planning to channel more of its strong free cashflow into investing in freehold properties and strategic investments rather than the underlying business."

Following the update, Cantor downgraded its 2017 pre-tax profit forecasts to £205m from £290m with weakness in sterling against the dollar taking EPS to 26.3p from 36.0p, with similar revisions to subsequent year forecasts.

Shares in Sports Direct were down almost 10% to 315.75p just after noon on Wednesday, though this only wipes out the share price gains since the start of September.