Sports Direct International plc’s turnaround hits the back of the net

Mike Ashley unveils a 60% drop in company profits and the share price jumps 8.41% in early trading. Isn’t that just typical of Britain’s most controversial chief executive? This morning’s preliminary finals from Sports Direct International (LSE: SPD) have scored with investors. How does he do it?

This sporting life

Naturally, it is all about expectations. City analysts were forecasting a healthy 10% increase in revenues to £3.18bn but with pre-tax profits likely to halve, and that is pretty much what they got. Investors already knew that Sports Direct had been hit hard by the higher minimum wage and falling pound, but were encouraged by signs of a brighter future, and the appointment of a new finance director.

Preliminary results for the year ended 30 April 2017 showed group revenue up 11.7% to £3.25bn, beating forecasts, but with underlying profit before tax down a massive 58.7% to £113.7m, largely as expected. Revenues looked healthy with 6.3% growth in UK sports retail to £2.14bn, while international sports retail revenue rose a more impressive 38% to £665.6m.

Ash cash

The market was also cheered by the optimistic outlook, with Sports Direct aiming to achieve growth in underlying EBITDA growth of between 5% and 15% in the full-year 2018. 

Mike Ashley continues to pursue his dream of turning Sports Direct into the “Selfridges” of sport by migrating to a new generation of stores to showcase products from its third party brand partners. We have invested over £300m in property over the last year, and I am pleased to report that early indications show that trading in our new flagship stores is exceeding expectations,” he said. 

Direct equity

He also assured investors that he will conservatively manage the sterling/dollar volatility that hammered full-year EBITDA while warning that like many UK retailers, the company remains exposed to currency fluctuations. He also announced the appointment of new chief financial officer Jon Kempster, formerly finance director of logistics and distribution group Wincanton.

Despite today’s good cheer, Sports Direct still has a fight on its hands, as it battles shareholder and politician concerns about corporate governance and UK working conditions, with shoppers also squeezed by stagnant wages and rising inflation. However, analysts praised its recent move to acquire a 26% stake in video games retailer Game Digital, which has similar customer demographics, and all eyes are now on its $100 million US venture.

Sports Direct may be a winner today, but with earnings per share (EPS) forecast to drop another 17% in 2018, and pre-tax profits possibly falling below £100m, tomorrow will still be tough. 

Fashion fun

Online fashion retailer ASOS (LSE: ASC) might tempt those looking for a faster growth story, with the company recently reporting a 32% rise in sales in the four months to the end of June, with international revenue up 44%. The group expects sales growth for the current financial year to be at the upper end of its 30%-35% range.

Sales rose 16% in the UK but really delivered the goods in the US and EU, where they flew 38% and 41% respectively, and 54% in the rest of the world. The number of active customers is rising sharply, while EPS are forecast to rise 23% in 2017, and 29% in 2018. ASOS is a thrilling growth story, the big question is whether you are willing to buy in at today’s forecast valuation of 75 times earnings.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Sports Direct International. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes