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Is Sports Direct likely to fall further or could it bounce back?

There’s really no other way of putting it, results from Sports Direct (LSE: SPD) were a horror show for investors. Following several delays, the now-diversified retailer did finally manage to release results on Friday, after the markets had closed. In the report, there was a cocktail of problems and the share price fell heavily — over 20% when the stock market reopened. 

Core earnings fell 6%, CFO Jon Kempster resigned, the Belgian tax authorities are demanding €674m and House of Fraser’s problems are “terminal“. Any one of these issues alone should be cause for concern. Added together, they’re an investor’s nightmare.  

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The problems

The acquisitions the retailer is making don’t seem to be adding any value. Last year Sports Direct saw an £85.4m impairment following its investment in failing retailer Debenhams. The company also said that problems at House of Fraser, which it acquired during the year, were “nothing short of terminal in nature“. Sports Direct majority owner Mike Ashley blamed previous management of the two companies for the troubles, but nobody forced him to invest in the businesses.

The big new problem is the whopping tax demand from the Belgian authorities. It was this that likely led to the delay in the results. It was detailed at the bottom of the statement, but many journalists like to read the end of statements first as the juiciest information can often be found there, so it got top billing in many headlines. Sports Direct revealed it had been given a bill of €674m, including 200% penalties and interest by the Belgian tax authorities after an audit.

It’s hard to see how the share price can go up from this point until the many problems the group faces are resolved. The outcome of the tax demand may play a crucial role in what happens next at Sports Direct.

A rival on the up

JD Sports Fashion (LSE: JD) shares meanwhile have been charging up. In the year to date they have risen by 77%. In June, the company joined the elite FTSE 100, such was the extent of its increase in valuation.

What’s it been doing right? It seems like pretty much everything. Earlier this month it stated that it will at least meet current consensus market expectations for full-year headline pre-tax profit. This kind of confidence reassures investors, hence the share price continuing to move up.

The retailer has been expanding internationally, with a net 18 new stores to date across Europe, a net five new shops in the Asia Pacific region with additional stores in both Malaysia and Australia. The group now has a sixth store in the US and in May a website was completed in that massive market which could add rocket fuel to its growth. Importantly too, it has good relationships with the top brands it relies on, while Sports Direct has admitted it has some challenges on this front.

The downside is JD’s shares do look quite expensive with a PEG above 1.6 and a P/E of around 21, so it may be better to wait and see if the shares fall back before dipping into this very successful retailer. Longer-term though, JD Sports looks like a winner that’ll keep on rising.

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Andy Ross 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.

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