Sports Direct’s profit crumbles after Sterling collapse and staffing scandal bite

LONDON — Profits at discount sports retailer Sports Direct collapsed by more than half last year, after the collapse in the value of the pound, costs related to a pay scandal, and issues with international stores all ate into earnings.

Underlying pre-tax profit fell by 58.7% to £113.7 million, results published on Thursday show, while underlying earnings before exceptional costs fell by 28.5% to £272.7 million. Revenue in the year to 30 April 2017 rose by 11.7% to £3.24 billion.

CEO and founder Mike Ashley says in Thursday’s full-year results:

“As previously announced, the devaluation of Sterling against the US dollar has led to a significant impact on EBITDA and profits in FY17.

“We have put in place hedging arrangements to minimise the short-term impact of currency volatility, but like many UK retailers we remain exposed to medium / long term currency fluctuations. Our results were also impacted by provisions and depreciation charges.”

Ashley flagged troubles in Sports Direct’s international operations, “largely as a result of the impact of increased onerous lease provisions across Europe stemming from a review of poorly performing stores where the US dollar exchange rate has reduced margins.”

Last year’s staffing scandal has also led to higher costs. Sports Direct was forced to admit it was paying staff at its Shirebrook warehouse less than minimum wage. As well as back-paying what staff were owed, the company called in lawyers to carry out an internal review of practices after an MPs’ report compared its operations to a “Victorian workhouse.”

As a result, operating expenses at Sports Direct rose by 10.3% to £614.1 million. Store wages rose by 6.5% t0 £164.5 million, well above inflation.

Ashley and chairman Keith Hellawell both called 2017 a year of “transition” and reiterated Sports Direct’s goal to become the Selfridges of sports retail.

Ashley, who is currently involved in a bitter legal dispute with a former business partner, said in the results statement: “Sports Direct is on course to become the “Selfridges” of sport by migrating to a new generation of stores to showcase the very best products from our third party brand partners.

“We have invested over £300m in property over the last year, and I am pleased to report that early indications show that trading in our new flagship stores is exceeding expectations.”

The company says it is “optimistic” about the year ahead, and expects underlying earnings growth of between 5-15%. But Sports Direct adds: “However, we will continue to be conservative in managing for the medium to long term, which may result in short-term fluctuations in underlying EBITDA, particularly given the continued uncertainty surrounding Brexit.”