Sports Direct profit slumps nearly 60% but investors welcome brighter outlook

In the 53 weeks to 30 April, pre-tax profit dropped 58.7% to £113.7m as the company highlighted the negative impact of a weaker sterling in the aftermath of the Brexit vote and strategic challenges in its operations in continental Europe.

The drop in profit came despite nearly 12% growth in revenue to £3.25bn, with UK sports retail revenue up 6.3% in the year to £2.14bn, while international sports retail revenue rose 38% to £665.6m. Analysts had been excepting group revenue of £3.16bn.

At 0925 BST, the shares were up 6.4% to 320.05p, with analysts pointing to the better-than-forecast revenue and the optimistic outlook as the company said it was aiming to achieve growth in underlying earnings before interest, tax, depreciation and amortisation of around 5% to 15% in full-year 2018. RBC Capital Markets had been pencilling in an 8% decline.

Chief executive Mike Ashley said: "Sports Direct is on course to become the 'Selfridges' of sport by migrating to a new generation of stores to showcase the very best products from our third party brand partners. We have invested over £300m in property over the last year, and I am pleased to report that early indications show that trading in our new flagship stores is exceeding expectations.

"We will continue to invest and make decisions for the long term, whilst trying to conservatively manage the currency volatility that is reflected in our full year results. As previously announced, the devaluation of Sterling against the US dollar has led to a significant impact on EBITDA and profits in FY17. We have put in place hedging arrangements to minimise the short-term impact of currency volatility, but like many UK retailers we remain exposed to medium/ long term currency fluctuations. Our results were also impacted by provisions and depreciation charges."

Also on Thursday, the company announced the appointment of Jon Kempster as chief financial officer with effect from 11 September. Kempster was finance director of logistics and distribution group Wincanton from July 2010 to November 2012. Prior to that, he was group finance director of industrial group Delta between November 2006 and July 2010.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "The Force isn’t with Sports Direct at the moment. The key culprit for a massive fall in profits is the weaker pound, which has decimated the retailer’s margin on sales. However much of this was already baked into expectations, and management’s forecast of a rise in earnings next year has piqued the market’s interest, with the stock price rising sharply.

"Sports Direct still faces challenging times. The retailer is trying to reinvent itself into the Selfridges of sports in the UK, while at the same time launching in the US, and fighting off concerns from shareholders and MPs about corporate governance and working conditions in the UK. All this while the weak pound is increasing costs, and the British consumer is facing rising inflation and weak wage growth, not a pretty combination for the price-sensitive shoppers who turn to Sports Direct for a bargain."