Sports Direct has announced a 6% decline in underlying EBITDA (cash profits as measured by earnings before, interest tax, depreciation and amortisation) to £287.8m.
That reflects increased costs associated with the House of Fraser integration, with the newly acquired business reporting an EBITDA loss of £54.1m. Without this acquisition, underlying EBITDA would have improved 10.9%.
The group will commence a £30m share buyback at the end of July.
The shares fell 10% following the announcement.
Sports Direct's always had a habit of dabbling in superficially unrelated businesses - that's been costly this year. First Debenhams went into administration and now recently acquired House of Fraser is undergoing emergency surgery. Other names recently added to the shopping basket, such as GAME Digital and Evans Cycles, aren't exactly flying either.
The acquisition spree is supposedly working towards Mike Ashley's vision for the group's future. That involves becoming a "multi-brand, multi-category" retail powerhouse. The problem is it's not immediately clear how they fit into the big picture. Investors might be losing patience with Ashley's continued efforts to sweep up struggling retail names, but owning almost 62% of the shares means he has the final say.
Sports Direct Group is a hodgepodge of mismatched businesses, but underneath all the noise is a sound sports retail operation. We'd prefer if more attention was given to this area of the business, where plans are clearer, and make far more financial sense.
The group's turnaround plan, the "Selfridges of Sport" initiative, calls for new freehold 'flagship' stores, displaying products in a more flattering environment. A better store environment should, in theory, allow the group to charge more for its products and heal Sports Direct's troubled relationships with the major sports brands as well.
The new format stores are said to be going well. Although possibly due to the challenging retail environment, it's hard to see evidence of that in the numbers. Improvements in underlying profits have been driven by cost cutting and one -off currency-related moves.
Sports Direct hasn't paid shareholders a dividend since 2010 - arguing that the money could be more usefully invested back in the business. That's included share buybacks as well as acquisitions and investment for growth. Investors might be wishing they had the cash in their pockets at the moment
All-in-all, it's difficult to get behind Mike Ashley's vision. Buying and renovating rundown retailers has taken precedence over the principal part of the business, to the detriment of shareholder confidence. Combined with a corporate governance record that's erratic at best, there are plenty of reasons to be cautious where Sports Direct is concerned.
The shares trade on 12.2 times expected earnings, 15.4% shy of their longer-term average.
Full year results
Group revenue improved 10.2%, reaching £3.7bn. However, once the impact of acquisitions and exchange rates are removed, revenue was down 1.9%.
The core UK Sports Retail division saw revenue increase marginally, to £2.2bn. Excluding the acquisition of Evans however, this number declined 2.9%, and on a like-for-like (LFL) basis, sales were down 1.6%. The acquired Evans business reported an operating loss of £17.8m, and underlying divisional cash profits fell 4.7% to £264.7m.
On a constant currency basis European revenue decreased 5.5%, partly driven by the closure of a net two stores during the year. LFL sales were up 0.9%. Lower operating expenses helped underlying EBITDA reach £29.3m (2018: £14m).
Wholesale and Licencing and Premium Lifestyle achieved cash profits of £32.6m and £13.7m respectively, while Rest of World saw losses lessen to £0.9m.
Lower profits contributed to a 16.2% decrease in free cash flow of £273.3m. However, net debt decreased £18.6m to £378.5m, as M&A spending was offset by store disposals and slightly lower capital expenditure.
Following a tax audit by the Belgian authorities, Sports Direct has been issued with a payment notice totalling EUR674m, which includes outstanding tax plus penalties and interest. The date of any payment and the final amount due is yet to be determined. The Sport's Direct board believes it's "less than probable" a material amount will be due.
The group remains mindful of the difficult trading environment on the high street, and recognises the "significant challenge" turning House of Fraser around brings. As a result the group has decided not to issue guidance for the rest of this financial year.
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