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Is now the perfect time to pile into Sports Direct International?

Sports Direct International (LSE: SPD) has crashed from a peak of 815p just over three years ago to 270p today, losing two thirds of its value amid infighting and controversy. However, buying troubled companies like chief executive Mike Ashley’s vehicle can make you seriously rich, if you get your timing right.

This sporting life

The FTSE 250 company is down another 2% today after publishing its first-half results to 28 October that revealed a 26.8% drop in underlying profit before tax to £64.4m. This was down to recent acquisition House of Fraser, whose underlying EBITDA fell by £31.5m. Excluding the troubled store, underlying EBITDA rose 15.5% to £180.3m.

The group’s debt increased 27% to £505.5m since 29 April, while it also “recognised £76.7m of value reductions relating to Debenhams and various other investments”.

This is a tough time for the high street but UK Sports Retail revenues slipped just 0.2% to £1.14bn. There were other positives today, including a 4.5% rise in group revenues to £1.79bn, with group gross margins up from 38.6% to 41.5%.

House call

The market response has been mild because everybody knew Ashley was taking on a challenge with House of Fraser. As he said today: The previous House of Fraser senior management team traded the business whilst it was insolvent for a long time, this means we have significant challenges ahead in turning House of Fraser around”.

He remains optimistic, saying: “I genuinely believe we have acquired a fantastic opportunity”, and calling on the support of local councils and landlords to support his bid to “turn House of Fraser into the Harrods of the High Street”.

Street fight

Ashley was keen to hail the success of the wider group, which he says is impressive amid current high street struggles, and said underlying EBITDA should remain in its previously communicated growth range of 5%-15% by year end, although including House of Fraser we expect to be behind last year’s result”.

Ashley is either brave, crazy, or something you might chant at a football match but I wouldn’t write here. The question isn’t whether House of Fraser has problems but whether he can turn it around, and also make a go of recent purchase Evans Cycles, and the hefty stake in Debenhams.

Hero to zero

A big danger with investing in a company with a dominant central figure like Ashley is the risk of hubris in a self-made man. You can see how intoxicating it must be to appoint yourself as the saviour of the high street, and how it could end in financial tragedy.

At least consumers’ wages are picking up, but Brexit is no nearer being resolved and few bricks and mortar stores have found a solution to the digital shopping revolution, although Sports Direct has done well with its policy of discounting luxury brands.

Trading at 13.8 times earnings, I expected a bigger discount. City scribblers forecast that EPS will fall 2% in the 29 financial year, but rise 16% in 2020, which is something. Sports Direct has a fight on its hands. Ashley likes a dust-up. Do you?

Capital Gains

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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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 us better investors.