Mike Ashley’s Sports Direct suffered a painful blow to its bottom line as the firm’s strategic stake in ailing Debenhams sent full-year profits tumbling.
The value sports chain said it was forced to write off £85m on its near-30 per cent holding in Debenhams, which – after three profit warnings this year – has seen its market cap shrivel to £155.7m.
The blow contributed to a 72.5 per cent plunge in pre-tax profits to £77.5m, and comes after Ashley lost £11m on his 11 per cent stake in the struggling House of Fraser chain, raising questions over the Newcastle United owner’s High Street investment strategy.
Mike Ashley has invested in flagship stores as he hopes to turn Sports Direct into the Selfridges of Sports
Sports Direct also blamed the profit drop on tough comparatives; with earnings a year earlier jumping following the sale of its Dunlop business and its JD Sports shares.
The firm’s share price – up 50 per cent in the past year – has been particularly bullish in recent weeks, as investors anticipated the retailer would cash in on the World Cup.
However, shares plunged 11 per cent in early trading, with no such mention of football fever to be found.
The retailer habitually invests in its High Street peers. As well as House of Fraser and Debenhams, it has shares in French Connection, Goals Soccer Centres and most recently snapped up a stake in Game.
‘A big slump in annual profit suggests the business should stick to its core skills rather than engaging in speculative investments in the retail sector,’ said Russ Mould, investment director at AJ Bell.
But Lee Wild, head of equity strategy at Interactive Investor, is more upbeat about the retailer’s performance, and claims the firm’s so-called elevation strategy to become the “Selfridges of sport”, is going better than expected.
‘Pumping money into flagship stores helped increase UK profit by 6.5 per cent, while Europe turned a £22m loss into a profit of £14m,’ Wild said.
‘If the concept works as well as these results suggest, plans to open another 10-20 new generation sports stores this year gives room for optimism.’
Ashley said Sports Direct has been named among the 10 companies with the most improved reputation in the UK, after below-par conditions at its warehouse emerged two years ago
The retailer’s underlying performance, excluding its investment portfolio, paints a brighter picture, with group EBITDA rising 12.2 per cent to £306m.
Michael Murray, who is engaged to Ashley’s daughter and has just been handed the role of head of elevation, said: ‘As the property pipeline and brand relationships accelerate, we are confident in achieving between a 5 per cent and 15 per cent improvement in underlying EBITDA for the coming financial period.’
Group sales rose 3.5 per cent in the year to £3.4bn, but UK retail sports sales declined 2 per cent to £2.2bn, amid challenging conditions on the High Street.