Sports Direct share price: what to expect from annual results

When is Sports Direct’s earnings date?

Sports Direct International was originally due to report preliminary annual results on Thursday 18 July to cover the year to the end of April 2019. However, it has since postponed the results because of the 'complexities of the integration into the company of the House of Fraser business, and the current uncertainty as to the future trading performance of this business', which has caused issues with its audit. The results should be posted sometime between 26 July 2019 and 23 August 2019.

'Sports Direct believes its accounts and their audit to be at an advanced stage. However, there are a number of key areas to conclude on which could materially affect the guidance given in Sports Direct's announcement of 13 December 2018,' the company said in a statement on 15 July.

The following earnings preview was written before the results were delayed, and based on the guidance and expectations before the company’s statement.

Sports Direct results preview: what does the City expect?

The chief executive of Sports Direct, Mike Ashley, once vowed to ‘save the high street’ by rescuing troubled retailers and the company has continued its aggressive expansion to become a one-stop shop for consumers.

The company has saved several retailers from collapsing over the past year, including Evans Cycle, Sofa.com and department store chain House of Fraser. It also unsuccessfully made efforts to buy others, including Debenhams and Findel, and is currently in the process of buying GAME Digital for around £52 million after the firm admitted sales had waned and the outlook was bleak. It is also flexing its muscle over investments in other retailers in the hope of steering them in the right direction. Sports Direct has intervened in the accounting scandal that has rocked its investment in five-a-side football operator Goals Soccer Centres.

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The company has been investing in other retailers for years. Ashley, who has made a name by buying up sportswear brands like Lonsdale and Slazenger on the cheap, sees an opportunity in buying or investing in struggling rivals while they are on the back foot. Expanding in this way can deliver greater buying power and efficiencies at a time when profitability is stretched across the entire industry.

But this has added significant weight to the business, particularly the £90 million acquisition of House of Fraser. Sport Direct’s underlying earnings before interest, tax, depreciation and amortisation (EBITDA) fell 4.7% in the first half (H1) of the financial year to £148.8 million solely because of the department store. Excluding House of Fraser, underlying EBITDA grew 15.5% to £180.3 million.

Some have criticised Sports Direct for using funds to invest in or buy retailers that have proven they are not fit for business, especially when the company is facing many of the same challenges, such as the need to revamp stores.

The expectations are not high for the full year (FY). Sports Direct has said underlying EBITDA should rise by 5% to 15% year-on-year (YoY) from the £306.1 million reported in the last financial year. That should see earnings of somewhere in the range of £321 million to £352 million. However, it has said underlying EBITDA will be lower YoY once House of Fraser is included.

Sports Direct said in early December that trading conditions had been 'unbelievably bad' over November and the run-up to Christmas, but that this had been factored into its FY guidance. Still, estimates taken from Bloomberg suggest analysts are unconvinced it can deliver that.

What to watch out for in Sports Direct’s annual results

• Underlying EBITDA and other financial key performance indicators (KPIs): Underlying EBITDA is guided to rise 5% to 15% YoY from the £306.1 million reported in the last financial year. With such a large range there is plenty of opportunity to surprise or disappoint the market. Revenue is likely to continue rising as it has done in recent years, particularly because of the added sales from acquisitions. Reported pre-tax profit is likely to experience its third consecutive year of decline from the £77.5 million booked last year.
• UK Sportswear: Sportswear is the main driver of the business, accounting for the bulk of revenue. H1 sales dipped but its gross margin improved to 40.6% from 39.4%, with underlying EBITDA rising 1.5%. Investors will be hoping the hub of the business can see further margin improvement and an acceleration in earnings.
• Premium Lifestyle: This segment includes Flannels and other Premium fascia stores. It is a much smaller part of the business but one of the faster-growing segments. Revenue rose to £87.6 million from £67.7 million in H1, while the gross margin increased to 34.2% from 31.8%. Underlying EBITDA jumped from just £700,000 to £2.5 million in the period.
• European Sports: This includes its 250-or-so stores in Europe. Once again, revenue declined in H1 but profitability improved with a margin of 43.5% versus 40.6%. Underlying EBITDA jumped 42% in H1 to £19.2 million.
• Rest of the World: Revenue in H1 breached £100 million for the first time and its margin leapt to 39.9% from just 17.6% the year before. Still, the segment reported a £4.9 million loss, narrower than the £20.9 million loss a year earlier. Further progress toward profitability will be welcome.

• House of Fraser: House of Fraser will have continued to lose money this year and will weigh on the rest of Sports Direct’s results, hence why it will separate the department store’s figures from the rest of its operations. In H1, when it owned the department store for around 11 weeks, House of Fraser booked underlying EBITDA loss of £31.5 million on revenue of £70.1 million and boasted the lowest margin across the group. It has said previously said that the department store could breakeven in the new financial year – so watch out for guidance as some believe this view is now too optimistic in the current climate.
• Share buyback: Sports Direct, which does not pay a dividend, announced it would buy back £100 million worth of shares earlier this year. It said the programme should be completed by the time it holds its annual shareholder meeting in early September 2019. The company needs to invest large sums in its own business and that of others, and net debt has crept up during the year, so it is unclear whether further buybacks will be announced in the annual results. Net debt stood at £505.5 million at the end of October, up 7.2% from a year earlier, although underlying free cashflow jumped 49% in H1. Net debt at the end of H1 was equal to 1.5 times long-term reported EBITDA.

Are share buybacks the best use of cash?

• GAME acquisition: Sports Direct initially invested in GAME back in 2017 but has recently launched a buyout after its stake exceeded the 30% required to launch a mandatory takeover offer. Its latest statement on 9 July said it had received acceptances (including its own stake) from 54.3% of GAME shareholders – above the 50% threshold needed. Investors should prepare to find out how the purchase is progressing and what its plans for the business are. Sports Direct is keen to tap into GAME’s newer business named Belong, which creates physical places for people to play game consoles and compete against one another.

What’s the outlook for Sports Direct shares after GAME Digital bid?

How to trade Sports Direct’s annual results

Sports Direct shares have significantly underperformed the wider market over the six months to 9 July. Shares have fallen 6.3% while the FTSE 100 has risen 8.6% and most of its peer group has booked gains. JD Sports shares have jumped 56% in the same time frame and Next has risen 13%. However, it has outperformed retailers that are in more precarious positions, such as Super Group (down 16%) and Ted Baker (down 58%).

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There are only four brokers with recommendations on Sports Direct, according to Reuters, and their view on the business is firmly geared toward the downside with two believing it is adequately valued and another two thinking it is overpriced.

Sports Direct shares: broker recommendations

Sports Direct’s earnings: all eyes on House of Fraser

Sports Direct is transforming itself from a sportswear retailer into the home of numerous big-name brands, and is therefore becoming a better indicator for how the retail space is performing as a whole. Although Sports Direct had been one of the better performers at a time when most of the industry is struggling, it is now starting to feel the added weight from purchasing so many failing retailers.

The two key things that investors will focus on in the annual results is whether Sports Direct hits its underlying earnings guidance (to demonstrate the core business is still in good shape and that its investment in stores is paying off) and an improvement from House of Fraser. The department store looks certain to bring down overall earnings this year, so its future is key to that of the overall business. Sports Direct has previously said House of Fraser could break even in the new financial year (to end in 2020). Any reaffirmation of this would be welcomed by the market but if, as many expect, it has a more cautious outlook then it could be another year of being held back by the department store chain. Any movement on share buybacks could help win over investors too.

Sports Direct won’t stop taking advantage of the opportunities in the market and is likely to continue building a retail empire while prices are cheap. The question is, will it yield results over the longer term or start to drown the stronger parts of the business? Doubt behind its strategy is clearly growing: brokers do not see any upside in Sports Direct shares even after they have experienced such a dramatic fall this year, and over one-quarter of people trading Sports Direct with IG have gone short – meaning they expect the share price to fall further.