Sports Direct announced a 91% drop in full-year profits despite increased sales after the weak pound and investment losses took their toll.
The company, controlled by Newcastle United owner Mike Ashley, netted a profit of £10.7 million ($17.6mm) in the year ended April 26, against £118.9 million ($195.4mm) a year earlier.
Total revenues rose 9% to £1.37bn ($2.25bn). Sales suffered in the first half of last year when none of the home nations qualified for the Euro 2008 football tournament. The retailer is looking to next year's World Cup to revive UK sales, although it said that because the new football strips would probably be launched in March – a month later than in previous years – the sales boost will come later, in the 2010/11 financial year.
As expected, Sports Direct said it would not be paying a final dividend in order to concentrate on cutting its £430 million ($706.4mm) debts. The dividend removal is expected to save Sports Direct £14 million ($23 million) this year.
Much of the fall in net profit was caused by a £53 million (($87.2mm) loss due to the de-recognition of investment stakes in other sports groups such as Adidas, JJB Sports and JD Sports. The stakes were held for Sports Direct by Kaupthing Singer & Friedlander, which last year went into administration leading to dispute over ownership of the stake.
Sports Direct said it was “in dispute” with KSF's administrators, Ernst & Young, as to the true ownership of the shares. But for now, it said it had to take account the fact that it did not have full control over the shareholdings.
“We have now concluded that, while we continue to maintain that the shares are ours and should be delivered to us, we may not 'control' the shares for accounting purposes,” Sports Direct said in its full-year results statement to the Stock Exchange.
There was also losses from foreign exchange movements and currency contracts, which cost the group £27m; and a £31m charge for writedowns.
Sports Direct has also been hit by £30.5 million ($50.1mm) in writedowns related to acquired property bought that now appears overvalued and Everlast, acquired back in 2007 for £91 million ($149.5mm). That also depressed pre-tax profits.
Stripping out these factors, underlying pretax profits before taxes fell by 20.2% to £68.2 million ($112.1mm).
Underlying EBITDA down 8.9% to £136.8 million ($224.8 million).
The retail division saw sales grow 6.6% to £1.1 billion ($1.8bn), representing about 80% of total revenues. Within this division, UK wholesale sales fell 12%, while international sales jumped 32%, due to expansion.
In the past year, the group opened nine stores in Ireland, and seven stores in continental Europe. It plans to open between three and five new stores internationally this year.
In its brands division, sales jumped 20% with roughly equal growth coming from brand sales and licensing. The division manages and licenses a number of sports brands across the world, including Donnay, Dunlop, Everlast, Lonsdale and Slazenger.
Sport Direct said that its growth in the brands division will principally come from licensing, with 41 licensing deals signed this year bringing in $60m in revenues across the term of the licence.
Forsey singled out Everlast as one of the groups most promising brands.
“In spite of the challenging operating environment, Everlast has performed according to expectations,” he said. “It remains the preeminent boxing brand, and weve enhanced its profile with the launch of the Muhammad Ali collection, launched ahead of the brands 100-year anniversary next year. Theres a huge opportunity in mens and womens clothing for Everlast in the US, and we look forward to exploiting this opportunity as well as enhancing the brands existing performance.”
Gross margins across the group dropped to 40.8% from 43.6%, caused “almost entirely by the drop in the value of the pound.” In the UK, retail gross margins fell even more sharply, from 45.7% to 42.5%.
“The second half of the year remained challenging, but we are pleased with these solid full year results that reflect the resilience and relevance of our flexible business model, focused on the core principles of retailing,” said chief executive Dave Forsey.
Looking ahead, Forsey said that underlying earnings would be “at least £140 million ($230mm) this financial year,” but promised that the group would trim debts, currently £431.3 million – 3 times underlying earnings – to below £400 million.
During the year, the company opened 27 new stores in the UK.
The company owns the Sports World chain of stores, as well as brands including Slazenger, Lonsdale and Dunlop.
The company said it was operating comfortably within its banking covenants and had enough funding until April 2011. It will start talking to its banks about further funding later this year.
