Sports Direct reported underlying profit before taxes slumped 8.4 percent to £275.2 million in its year ended April 24 largely due to a hike in wages and slower sales in the second half of the year. Sales grew 2.5 percent to £2.9 billion.

The sales gain was primarily due to the increase in Sports Retail revenue of 3.9 percent to £2.49 billion, which includes the impact of the acquisition of the remaining 50 percent of the Heatons business during the year, and the increased store footprint. Premium Lifestyle revenue fell by 12.7 percent, largely due to the closure of loss-making stores in the period, and revenue was up 2.3 percent in Brands, with increases in both wholesale and licensing.

Group gross margin in the year increased by 40 basis points from 43.8 percent to 44.2 percent. Sports Retail maintained the previous year’s gross margin at 44.6 percent, while the Brands division gross margin increased by 180 basis points from 40.3 percent to 42.1 percent, and Premium Lifestyle’s gross margin increased by 330 basis points from 38.8 percent to 42.1 percent, which was largely due to discounting and clearance of stock in the prior year. The company expects gross margin to be impacted significantly by negative movements in exchange rates in FY17 and beyond, given the recent movements in the US dollar compared with the pound.

Group operating costs increased by 5.3 percent to £905.7 million (FY15: £860.5 million), as a result of completion of the Shirebrook campus and associated increased costs, the part year impact of the Group’s decision to increase
wages from the National Minimum Wage to above the National Minimum Wage for directly employed UK employees and directly engaged casual workers, and the impact of acquisitions.

As a result, Group underlying EBITDA (pre-Share Scheme costs) for the year was down 0.5 percent to £381.4 million (FY15: £383.2 million). Sports Retail underlying EBITDA was down 2.2 percent to £349.0 million (FY15: £356.8m), while the Premium Lifestyle and Brands division underlying EBITDA increased to -£5.1 million and £37.5 million respectively (FY15: -£7.7 million and £34.1 million). The Premium Lifestyle division achieved a breakeven Underlying EBITDA result in 2H FY16.

Excluded from underlying EBITDA is a £7.1 million (FY15: £10.1 million) charge in respect of the 2011 Share Scheme. This charge has been taken centrally and is not reflected in the divisional numbers in this report.

The depreciation charge has increased by 41.0 percent to £95.6 million (FY15: £67.8 million) due to the acquisition of the controlling interest in Heatons and increased investment in our store portfolio.

Group underlying profit before tax decreased 8.4 percent to £275.2 million, due to lower EBITDA and higher depreciation charges. In line with this movement, underlying EPS for the year decreased by 8.7 percent to 35.5p (FY15: 38.9p).

The Group generated underlying free cash flow during the year of £309.1 million, up from £301.8 million in the prior year, and net debt increased by £39.9 million to £99.6 million at year end as a result of investment in inventory, freehold property and the acquisition of Heatons. Net debt currently stands at 0.31 times reported EBITDA (26 April 2015: 0.16 times).

In its statement, Dave Forsey, chief executive, said:

“The Group has delivered a disappointing full year financial performance, impacted primarily by a tough trading environment in the second half across our sports retail businesses. Our continued investment in upgrading and relocating stores, including Key Location Doors such as Leeds and Plymouth, has been well received by our leading third party suppliers.

Unfortunately our disappointing results have meant that the Group has not achieved the first EBITDA target set by the 2015 Share Scheme, which is a key long term share-based incentive scheme that rewards eligible staff for their hard work and commitment, and is based on the achievement of four consecutive full year EBITDA targets. This is very disappointing as the Share Scheme is a significant part of our high performance and reward culture, and we are working to replace this arrangement with a new incentive scheme to continue to reward our people for their commitment and performance.

I would like to thank all of our people for being part of the Sports Direct team in what has been a particularly tough year for the Group. Thank you for all your hard work this year and in the past, and I look forward to our future achievements.”