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Sports Direct shares climb despite disappointing results

George Salmon | 23 September 2016 | A A A
Sports Direct shares climb despite disappointing results

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Sports Direct Intl Plc

Sell: 280.00 | Buy: 280.40 | Change -4.40 (-1.54%)
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Our view:

2016 has been an eventful year for Sports Direct. An unseasonably warm winter led to profit warnings before and after Christmas, the Group has dropped out of the FTSE 100 and founder Mike Ashley was called before Parliament to explain working conditions in its Derbyshire warehouse.

Since the year-end, yet more column inches have been devoted to Sports Direct. CEO Dave Forsey has now resigned, with Mike Ashley stepping back into the hotseat. The move provides some clarity on the leadership of the company, as despite not being in official control, Mike Ashley has attracted more attention than might be expected of an 'Executive Deputy Chairman'.

With like-for-like sales and the share price both falling, whether changes at the top means a change in direction remains to be seen. For years, Sports Direct was an all-conquering behemoth in the UK, destroying rivals like JJB through a relentless focus on value. Now it seems that the low costs that made that possible, and resulted in the company becoming a hate figure with trade unions, have proven unsustainable. The fall in sterling will put pressure on gross margins and Sports Direct may be forced to raise prices to recoup the extra costs.

Nor are costs Sports Direct's only problem. The Sports Direct model has always been to draw consumers in with the big brands before hitting them with own brand value. By all accounts third party brands have been pulling their best product from Sports Direct stores - no longer happy to see their brands offered as loss leaders in jumble sale conditions. Higher own brand sales are helping in the short term, but expecting brands such as Lonsdale and Slazenger to take up the slack from Adidas and Nike is asking a lot.

Current trading aside, Sports Direct has continued to take stakes in other retailers. Along with the long-standing interest in Debenhams, which has led to Sports Direct taking concessions in nine Debenhams stores, the group also has major stakes in Findel, Dicks Sporting Goods Inc and Iconix Inc.

Despite throwing off tonnes of cash the group hasn't offered investors a dividend since 2010 - arguing that the money could be more usefully invested back in the business. At the moment though it's difficult to see the attraction of a business with falling like-for-like sales and a history of unprofitably investing big sums into stake-building in unrelated companies for no clearly explained purpose.

Full year results (7 July 2016):

Sports Direct shares are up 15% this morning, after releasing what was described as a "disappointing" set of FY16 results. Profits were at the bottom of guidance - but some analysts had expected even worse.

Group Revenue increased 2.5%, with the core Sports Retail business delivering 3.9% growth (0.6% excluding the effect of the Heatons acquisition) and like-for-like sales in the division falling 0.8%. The group saw a small increase in gross margin, to 44.2%, while Sports Retail saw margin hold steady at 44.6%.

However, Group underlying EBITDA is down 0.5% to £381.4m, scraping in at the bottom of amended guidance, while the Sports Retail business saw EBITDA fall 2.2% to £349m. That follows an overall 5.3% increase in operating costs as a result of an increased wage bill and additional costs at the Shirebrook warehouse.

The company has announced that it is considering beginning a share buy-back programme following the recent fall in share price fall and confirmed that Mike Ashley has no intention of taking the company private.

Outlook:

The group expects the EU to act as a drag on consumer confidence going forwards, adding to existing problems with high street footfall. The group is heavily exposed to the weakness of the pound versus the US dollar, and is unhedged for FY 17 and beyond, which is expected to have a negative impact on gross margin.

Together these headwinds lead the company to describe the outlook for FY17 as "somewhat uncertain and therefore hard to predict"

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

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