Sports Direct results: Here's how six City analysts reacted

 
Emma Haslett
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Sports Direct founder Mike Ashley expects ebitda to rise as much as 15 per cent (Source: Getty)

Shares in Sports Direct were up almost seven per cent in mid-morning trading, despite the retailer posting results showing its pre-tax profits plunged 60 per cent last year.

Could it have been founder Mike Ashley's uncharacteristically grown-up decision to hire a chief financial officer which buoyed investors? Or could it simply have been the company's ambitious expectations for earnings before interest, taxation, depreciation and amortisation, which it said will grow by between five and 15 per cent this year? Here's what six City analysts think:

Read more: Here's every surprising Sports Direct moment in the last 18 months

1. The new finance chief has his work cut out

"These results are grim. Deteriorating margins across the board, a truckload of provisions and sterling’s post-referendum crash caused a 59 per cent plunge in underlying pre-tax profit, even with an extra week in this financial year.

"Ashley knows he’s on the ropes, and the rationale for parachuting in turnaround specialist Jon Kempster as finance director today is clear.

"Talk these days is more about Ashley’s wheeler dealing, taking stakes in UK and American retailers. Yes, the international business is growing fast, but it will need substantially more than this to get Sports Direct shares back to 350p let alone its £9 highs.

"Anyone visiting Sports Direct stores these days knows the chain is far from being the ‘Selfridges of sport’. Kempster has his work cut out here."

- Lee Wild, head of equity strategy, Interactive Investor

2. Where's the detail?

"Mike Ashley… begins his statement by trumpeting that 'Sports Direct is on course to become the '"Selfridges" of sport by migrating to a new generation of stores to showcase the very best products from our third party brand partners' and later gives two mathematical examples of the success of the new stores, before going on to say “our outlook is optimistic and we aim to achieve growth in underlying ebitda in the region of approximately five per cent to 15 per cent during full-year 2018”.

"There is no mention of the investment in Game Digital and no mention of future share buyback plans (the company bought £93.5m worth during close season), but we guess the City will be reasonably impressed first thing today by the tone of the statement…"

- Nick Bubb, retail analyst

3. Challenges ahead

"We have been cautious on Sports Direct given our... forecasts are 10-15 per cent below consensus. We think it will be challenging for Sports Direct to grow profits in FY18 owing to the impact of dollar sourcing headwinds on own brand product bought from Asia (circa 50 per cent of sales) and higher operating expenses.

"We think it will be difficult for Sports Direct to pass on currency headwinds without a significant volume impact given discount shoppers tend to be very price sensitive. Also the sporting calendar is weaker in FY18 and Sports Direct is likely to face UK consumer headwinds given inflation pressures on UK household cashflow.

"Finally we see a risk of higher than expected markdown given high inventories... [but] we see a take-private scenario as unlikely."

- Richard Chamberlain, analyst, RBC Europe

4. The Force is not with Sports Direct at the moment

‘The Force isn’t with Sports Direct at the moment. The key culprit for a massive fall in profits is the weaker pound, which has decimated the retailer’s margin on sales. However much of this was already baked into expectations, and management’s forecast of a rise in earnings next year has piqued the market’s interest, with the stock price rising sharply.

"Sports Direct still faces challenging times. The retailer is trying to reinvent itself into the Selfridges of sports in the UK, while at the same time launching in the US, and fighting off concerns from shareholders and MPs about corporate governance and working conditions in the UK. All this while the weak pound is increasing costs, and the British consumer is facing rising inflation and weak wage growth, not a pretty combination for the price-sensitive shoppers who turn to Sports Direct for a bargain.

"Of course the latest company results are somewhat of a sideshow next to the recent courtroom outbursts of majority shareholder and chief executive Mike Ashley. Options to avoid the spotlight include taking the company private again, or registering his personal fiefdom as an overseas sovereign state, which in light of new regulatory proposals appears to side-step some of the finer points of corporate governance."

- Laith Khalaf, senior analyst, Hargreaves Lansdown

5. Encouraging signs

"2017 has been a busy year for Sports Direct as the group transitions towards elevating the sports retail proposition towards the long-term ambition of becoming the 'Selfridges' of sports.

"There has been significant improvement at the senior management level and positive steps have been made in improving stakeholder engagement across all levels of the group. The strategic partnership with Asics, the stake in Game Group and the appointment of a finance chief are just three of a larger number of positive steps undertaken.

"The prelims have been impacted by a number of well-flagged factors but we take encouragement that the right decisions have been made to ready the business to grow from a more sustainable level."

- Analysts at Liberum

6. Surprised and impressed

"The prelims are in line but the outlook statement is miles ahead of expectations (management sees growth in ebitda next year where we’d seen a decline).

"Just how management will get to five to 15 per cent growth will be a key focus of the analysts’ meeting and we are eager to know how Sports Direct can shift the focus of its range from own label product (50 to 60 per cent gross margin) to third party (circa 30 per cent gross) without impacting margins.

"Maybe it sees very strong like-for-likes ahead? Either way, we were surprised and impressed by this morning’s statement, which is as upbeat an outlook as we have heard from any retailer in recent reporting sessions. The shares will doubtless do well first thing, especially given the appointment of a new chief financial officer as well."

- Analysts at Peel Hunt

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