Sports Direct's optimism after profit slump propels shares

By James Davey

LONDON (Reuters) - British retailer Sports Direct reported a 29 percent slump in annual earnings, hurt by a weaker pound since the Brexit vote, but its shares soared on a forecast of growth this year and hopes management is finally getting its house in order.

The sportswear chain, founded and run by billionaire Mike Ashley, has been heavily criticised for its treatment of workers and poor corporate governance.

It was badly caught out by the fall in the pound after Britain's vote to leave the European Union in June last year as it sources most of its products from Asia priced in dollars.

Having failed to offset the risk of currency fluctuations for its 2016-17 financial year, the company put a hedge in place after the Brexit vote but that backfired too. It said it had now minimised the short-term impact of currency swings but remained exposed to fluctuations in the medium and long term.

However, Ashley, who owns 62 percent of Sports Direct's equity and wants to make the group the "Selfridges of sport", said on Thursday he was encouraged by better than expected trading from the first batch of a new generation of flagship stores designed to showcase brands such as Adidas and Nike.

The phrase refers to the British department store and Ashley’s desire to improve the look, feel and service of Sports Direct stores so that global sports brands let him sell their premium products, which has not always happened in the past.

He gave two examples of the enhanced contribution to earnings of the new stores, telling analysts: "We're smashing the ball out of the park on the 'Selfridges of sport' concept."

Sports Direct said its outlook was "optimistic" and targeted growth in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of 5 percent to 15 percent in the current 2017-18 year. Analysts had been expecting another decline.

It still cautioned over short-term fluctuations in underlying EBITDA, "particularly given the continued uncertainty surrounding Brexit."

NEW BLOOD

The stock, which lost half its value last year, jumped as much as 8.6 percent on Thursday, and was 7.8 percent higher at 324.5 pence at 1044 GMT, valuing the business at 1.72 billion pounds ($2.23 billion).

"We have yet to hear such an upbeat outlook statement from any of the retailers so far this year," said analysts at Peel Hunt, who have an "add" rating on the stock.

"Generating a rise in gross profit would be a terrific achievement given that the pressure on underlying gross margins persists as the sales mix shifts away from own label towards third-party items," they said.

With investors and analysts crying out for new executive blood on Sports Direct's board they also welcomed the appointment of a new finance chief - Jon Kempster, who has previously performed the same role at logistics group Wincanton.

Sports Direct made underlying EBITDA of 272.7 million pounds in the year to April 30, ahead of its forecast of about 265 million pounds issued in December but well below the 381.4 million pounds made in 2015-16.

Revenue increased 11.7 percent to 3.25 billion pounds but underlying pretax profit crashed 59 percent to 113.7 million pounds, reflecting both the currency movements and higher depreciation charges. No dividend is being paid.

Sports Direct made no mention in its statement of its recent purchase of a 26 percent stake in Game Digital.

(Editing by Paul Sandle and Adrian Croft)