Sports Direct interim profit drops as HoF weighs

In the 26 weeks to 28 October, underlying pre-tax profit fell 26.8% to £64.4m on revenue of £1.79bn, up 4.5% from the same period a year ago.

Underlying earnings before interest, taxes, depreciation and amortisation excluding House of Fraser were up 15.5% to £180.3m, but including HoF they were down 4.7% to £148.8m.

UK sports retail revenue was down 0.2% during the half, mostly due to store closures as part of the ongoing "elevation" strategy, while European sports retail revenue fell 5% for the same reason. Retail revenue in the rest of the world was up 26.2%, however, largely due to Bob's Stores and Eastern Mountain Sports in the US.

Sports Direct said that since its acquisition, HoF has contributed £70.1m of revenue and a loss before tax of £31.6m.

Chief executive Mike Ashley said: "During the reporting period we acquired the trade and assets of House of Fraser and I would like to welcome my new colleagues to the Sports Direct Group. I have made my views clear that I believe the previous House of Fraser senior management team traded the business whilst it was insolvent for a long time, this means we have significant challenges ahead in turning House of Fraser around.

"However, I genuinely believe we have acquired a fantastic opportunity and with the efforts of Sports Direct and House of Fraser teams, and the support of the brands, local councils and landlords, we can turn House of Fraser into the Harrods of the High Street."

Ashley said the company's underlying EBITDA performance was "impressive in the context of the current struggles in the High Street" and shows that the elevation strategy is going from strength to strength.

Excluding HoF, Sports Direct expects to be within its previously communicated underlying EBITDA growth range of 5-15% by year end. However, including the department store chain, it expects to be behind last year's result.

At 0915 GMT, the shares were down 2.7% to 268.90p.

RBC Capital Markets said the EBITDA figure including HoF was 5% below its forecast of £157m, while underlying pre-tax profit was 7% below its forecast of £69.5m.

"These results reinforce our view that SPD is finding it challenging to drive growth outside of its core UK sportswear business and that the recent House of Fraser acquisition will be a material drag on earnings for the group," said analyst Richard Chamberlain.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "The core business of Sports Direct is holding up pretty well in challenging conditions for the high street, but House of Fraser has proved to be a fly in the ointment. That’s only to be expected given the collapse of the department store, because turnarounds don’t happen overnight.

"The longer term success of the acquisition for Sports Direct investors will be determined by its ability to make a positive contribution to the bottom line. That also goes for the company’s more recent purchase of Evans Cycles, and its hefty stake in Debenhams.

"Raising Sports Direct’s already substantial bet on the high street would look like a brave call in a cyclical downturn, but in the structural decline we are seeing on the back of the digital shopping revolution, it looks positively Quixotic."