As I opened up the paper on Friday, or rather opened up the app on my tablet, I looked eagerly for the latest financial report from Sports Direct (LSE: SPD). I was informed, however, that the release had been delayed (and at that point was expected near lunch time). It had, of course, already delayed the results from earlier in the month, and Friday eventually saw the numbers published 10 hours after expected.
Now as much as I would like to take a ‘well these things happen’ kind of attitude to this tardiness, the truth is I have seen a number of last-minute delayed earnings publications in my career, and they have all ended up being an ominous indication of bad tidings for the company. Unfortunately, I think this time seems to be no different.
Tax liability
It turned out the delay was caused by a last minute Belgian tax liability of some €674m, that the company’s auditors had to include. Now, even if we can somehow overlook the glaringly obvious question of how a tax bill of this size could ever be last minute (something I am in fact, not willing to overlook), this is a very large number to be adding to the wrong side of the company’s balance sheet.
The rest of the figures were no better. Overall revenue was up from £3.4bn the previous year, to £3.7bn for the 12 months ending in April, while pre-tax profits were up from £61.1m to £179.2m for the same period. These numbers are not like-for-like however, and primarily the result of the company’s controversial acquisition of House of Fraser and an £85.4m impairment the previous year.
Excluding acquisitions and impairments, revenue actually fell by almost 2% in the year, while turnover at its key UK sports retail arm fell 3%. Underlying basic earnings per share fell almost 8% to 17.6p, though excluding House of Fraser, the company did say EBITDA grew 11% to £339.4m.
Cheap but not a bargain
As I write this, Sports Direct shares are down just under 10% on the day, having lost more than a quarter of their value initially after the market opened. At about 210p, they are almost half the price they were this time last year, with a price-to-earnings ratio of about 11. The shares then, are no doubt cheap, but only if it looks like the company is going to improve its performance in the future. At this point however, there is just no sign that this is the case.
Founder Mike Ashley, is also Chief Executive, and has generally failed in recent years to garner the trust of investors. The latest results debacle will only make this worse. More worrying is the poor performance at its UK sports retail arm though, which came very much as a surprise to the market. If this core business is not doing well, I think Sports Direct will need to start turning some things around before the shares are worth buying.
