Sports Direct issues profit warning on poor Christmas trading

Mike Ashley

Sports Direct, the FTSE 100 sports wear and fashion retailer, has warned that profits will be lower than expected, reports The Telegraph.

The company, which is 55 per cent-owned by founder and deputy chairman Mike Ashley, said it would fail to meet its target of earning £420m before taxand other costs in the year to April.

The retailer blamed “deterioration of trading conditions on the high street and a continuation of the unseasonal weather over the key Christmas period.”

Shares plunged shortly after the mid-morning announcement, triggering a rare automatic suspension in trading at 12.39pm. The stock resumed trading five minutes later and was down 15 per cent to 435p by 2pm.

Investors are likely to question the use of the unseasonally warm weather as a reason for lower profits, given the majority of Sports Directs’ products, including running clothes, T-shirts, and trainers, are not winter-focused.

Sports Direct, whose shares fell more than 15pc on the warning, said instead that it now expected to make between £380m and £420m in adjusted earnings in the current financial year, as much as 10pc below its original guidance to investors.

Shares in the retailer have fallen 37pc over the past year, in comparison with listed rival JD Sports, whose shares have more than doubled over the same period, despite the two firms largely stocking the same type of products.

The retailer’s market capitalisation is now below £2.7bn – a level at which, if it were to continue, Sports Direct would almost certainly fall out of the FTSE 100 at the next quarterly review in March.

The update caught investors by surprise, not least because Sports Direct, for whom the Christmas season is not as important as other high street retailer, does not usually issue a January trading update.

Analyst James Grzinic at Jefferies said he was ‘confused’ by the warning, coming less than a month after the retailer confirmed the £420m target.

“This feels like a clearing of decks exercise,” he said, adding that more light needed to be shed on key issues before considering a new valuation.

On using the weather as an excuse, Mr Grzinic continued: “Admittedly, recent trading updates by fashion peers have confirmed the ongoing pressure in demand in recent weeks, both in the UK and in Europe. The lack of snow in the Alps certainly represents an added challenge for some European operations.”

But analyst Jonathan Pritchard at Peel Hunt was less forgiving, saying that while the weather had been “unhelpful,” there are larger issues at play.

“We have long had an issue with the range (too much own label, not enough high-quality branded product), and some mud from press articles/documentaries may have stuck to the brand,” he wrote in a research note for investors entitled: “Don’t blame it on the sunshine.”

He went on to say that given the company only confirmed the original target a month ago, “things must have deteriorated quickly.”

The warning is the latest in a series of poor results from retailers over the Christmas period, following in the wake of worse than expected sales from Waitrose, Next and Marks & Spencer’s clothing division.

It follows a series of criticism levelled at the retailer, not least the revelation at the start of this week, following a story in The Telegraph last weekend, that Mr Ashley’s daughter’s boyfriend could be in line for millions of pounds of commission after his appointment as a property consultant to the retailer, working on the £250m roll-out of Sports Direct’s fitness superstores.

The retailer disclosed that Michael Murray, who is in a relationship with Mr Ashley’s daughter Anna, will receive up to 25pc of any increase in “value” of, which could be worth millions of pounds, according to analysts. However, it was not clear from Sports Direct what will be being valued or how any increase in value might be measured.

At the turn of the year, the retailer was accused of a “PR stunt” after it pledged to pay all staff above the minimum wage just weeks after revelations about the treatement of staff in its warehouses.

Mr Ashley, who said he was making a “New Year’s resolution pledge” to become the best high street employer after John Lewis, said the move would cost the company £10m.