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Are Sports Direct shares a contrarian buy after 15% price crash?

Shares in Mike Ashley ‘s Sports Direct International (LSE: SPD) slumped 15% in morning trading, recovering to a loss of around 10% by the time of writing.

The stock hasn’t been doing too well for a while now, down 40% over the past 12 months, and by 65% over five years. So are investors going off Ashley’s brash style of management, and is he overstretching himself? He lost a packet on Debenhams, after his takeover bid was rejected in favour of a rescue deal that wiped out shareholders, and the latest blip is down to another of his high street rescue takeovers.

Results delay

Sports Direct’s full-year results announcement was scheduled for Thursday 18 July. But that’s now been delayed, largely because of problems with the integration of House of Fraser “and the current uncertainty as to the future trading performance of this business.”

But it’s also been put partly down to “the increased regulatory scrutiny of auditors and audits including the FRC review of Grant Thornton’s audit of the financial statements of Sports Direct.” That means further time is needed to compile more information, together with extra time needed for audit completion.

In itself it might not end in bad news, but I’m a little disappointed we only got three days’ notice of the delay.

Still working?

I’m not convinced Sport’s Direct’s strategy of buying up well-known brands is still working. Some of them have been very successful, like the profit Ashley turned by buying and later selling Dunlop Slazenger brands. But, at the same time, some respected old brands have been turned into labels for cheap junk sold in Sports Direct stores.

Evans Cycles is now in Ashley’s hands too. And while it clearly was struggling in the high street slump, with expensive prime locations and really not much footfall inside the shops, I have my doubts about what it’s likely to turn into. And I wouldn’t like to guess what founder and cycling pioneer Frederick Evans might think of it now.

Bull case

There are good reasons to like Ashley’s super self-confidence, and buying up struggling retailers when they’re cheap could leave Sports Direct in a very good shape for when we finally get out of our current economic mess and see a return of consumer growth. So we definitely could be looking at a contrarian investment opportunity here.

But it’s not just a cyclical economic dip we’re in, we’re also looking at an online-led revolution in retail. And I’m convinced there are too many names out there on the high street than can be supported by today’s bricks & mortar shoppers.

And then there’s Brexit. Even with a deal, I reckon we’re in for another decade of economic weakness — and a no-deal departure could lead to catastrophe. I’m not sure I see where any post-weakness consumer growth is going to come from, not for a good few years at least.

With forecasts putting Sports Direct shares on a P/E of around 18, even after years of falling prices, I’m still avoiding.

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Alan Oscroft 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.