Sports Direct has hit a major obstacle in its ambitious plans to expand in China, while, a tough year has led to a 91 per cent plunge in profits.
The sports specialist was testing 121 branded areas in the stores of Chinese retailer ITAT, which has recently been bought by a supplier, halting talks on future growth.
Sports Direct reported: “We consider it prudent to make a provision against the cost of fixtures, fittings and stock currently held in China.”
Matthew McEachran, analyst at house broker Singer, said the ITAT deal was expected to have benefited revenues by now. “There was considerable potential from the former ITAT relationship. The latest development therefore has an adverse affect on our thinking,” he said.
“Management has been keen to point out, though, that the trial has provided valuable lessons and that the experience should allow them to commercialise any future forays overseas more effectively.” Sports Direct said unfavourable exchange rates had a marked impact on profits and that it is in dispute about stakes in rivals Blacks Leisure and JD Sports Fashion with the administrators of collapsed Icelandic bank Kaupthing Singer & Friedlander.
For the year to April 26 Sports Direct revealed its like-for-like gross contribution from retail was up 2.5 per cent. It is the first time the retailer has released any like-for-like figure.
Sports Direct expects EBITDA in its current year to be at least £140m and has proposed a new share scheme based on EBITDA targets.
It hopes the 2010 World Cup will be a big opportunity for its UK retail business but the impact of this will largely be felt in its next financial year. However, Investec analyst Katharine Wynne said: “The history of these significant events as a large boost to sales is often largely offset by margin dilutions.”
McEachran believes there are still opportunities for the sports retailer in the downturn. “The business is well positioned to continue to benefit from any trading down, and the retail operations appear to be performing relatively well,” he said.
Sports direct full-year results
- Group revenue up 8.6 per cent to £1.37bn
- Underlying EBITDA down 8.9 per cent to £136.8m
- Underlying pre-tax profit down 20.2 per cent to £68.2m
- Reported pre-tax profit down 91 per cent to £10.7m
- Net debt at end of year £431.3m
- Target to reduce debt to under £400m for financial year 2009/10