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Sports Direct shares plunge as profits plummet after taking hit from Debenhams stake

Last updated: 18:00 19 Jul 2018 AEST, First published: 17:26 19 Jul 2018 AEST

Sports Direct
Sports Direct raised its stake in Debenhams to 29.7% in March

Sports Direct International PLC (LON:SPD) reported a 73% slump in full-year profits after taking a hit from its investment in struggling department store chain Debenhams PLC (LON:DEB).

Debenhams shares have fallen more than 70% over the past 12 months after issuing its third profit warning this year in June.

Sports Direct raised its stake in Debenhams to 29.7% in March, just under the 30% threshold that would require the company to make an offer for the whole business.

The sportswear retailer said it took a £85mln hit on its stake in the troubled department store, sending its profit before tax down to £77.5mln in the year to April 29 from £281.6mln last year.

The profit also reflected a £80mln one-off gain made on the sale of Dunlop last year.  

READ: Mike Ashley's Sports Direct slumps as first half profits and UK sales drop

Premium lifestyle range boosts sales

Excluding items, underlying profit before tax grew 34.5% to £152.9bn as the retailer grew sales and cut costs.

Underlying earnings (EBITDA) edged up 12.2% to £306mln, meeting the top end of the company’s guidance range.

Group revenue increased 3.5% to £3.6bn, as a 42.7% jump in premium lifestyle sales and a 594% surge in rest of the world sales offset a 2% decline in UK sports retail, a 0.1% dip in European retail and a 22.7% fall in wholesale and licensing.

The retailer has been trying to go more upmarket by stocking more top brands like Nike, Adidas and Under Armour. It also spent £140mln on property acquisitions during the period with the aim to open new stores.

Sports Direct boss Mike Ashley said: “As the property pipeline and brand relationships accelerate, we are confident in achieving between a 5% and 15% improvement in underlying EBITDA for the coming financial period."

The group did not recommend a dividend for the year. 

Shares plunged 9.4% to 394p in morning trading. 

Challenging retail market

Sports Direct has a string of "strategic investments" in other UK retailers, including ailing House of Fraser, which recently announced a major restructuring.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said given the struggles facing the UK high street it is "hard to fathom the precise strategy at play here".

"Looking beyond the impact of subsidiaries and acquisitions, things aren’t great in the main UK business, but then given current trading conditions that’s to be expected," Khalaf said.

"Things are of course challenging in retail right now, but Sports Direct is the last man standing on the high street in its particular market, which puts it in a strong position. A good showing from the England football team in the World Cup should also have helped to boost coffers in recent weeks."

Liberum upgrades Sports Direct

Liberum raised its rating on Sports Direct to 'buy' from 'hold' and lifted its target price to 520p from 400p, saying adjusted pre-tax profits were about 23% of its forecast.

"A strengthened senior team, a focused and disciplined strategy that places property and brands at the very centre should result in increased customer loyalty, frequency of visit as merchandising, availability and product lines improve over the next few years," it said. 

"FY19 guidance for EBITDA growth has been set at 5-15% driving an upgrade to 5.6% to our forecast."

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