Sports Direct takes profit hit from ‘challenging’ House of Fraser acquisition

Sports Direct has posted a 27 per cent drop in half-year profits today, as costs from the acquisition of beleaguered department store chain House of Fraser weighed on the group’s balance books.

Shares in Sports Direct slumped 12.7 per cent this afternoon, with the retailer rushing out an urgent clarification this afternoon after Mike Ashley said that last month had been “the worst November for retailers in living memory”.

The firm said: "At the Interim Results Presentation held at Academy House today, in response to a question concerning current trading in our sports retail business Chief Executive Mike Ashley stated that November's trading was unbelievably bad. The Company wishes to confirm, however, that we have taken November's trading into account, and we reiterate Mike Ashley's statement included in the Interim Results announced earlier today: "Excluding House of Fraser we anticipate we will be within our previously communicated underlying EBITDA growth range of 5-15% by year end, and including House of Fraser we expect to be behind last year's result."

Ashley’s remarks came as part of a scathing attack on Debenhams, which the retail magnate claimed had rejected his offer of a £40m interest-free emergency loan.

In a letter addressed to Debenhams boss Sergio Bucher, the billionaire Sports Direct owner suggests that without the money the company "has zero chance of survival".

Ashley, who controls a 30 per cent stake in the high street chain, expressed concerns that "the board doesn’t really seem to appreciate the position that Debenhams is currently in and their responsibility to shareholders", adding that last month had been the "worst November for retailers in living memory".

The comments come on the same day as Ashley’s company Sports Direct posted a 26.8 per cent fall in underlying profit before tax in the half-year to October.

Group underlying earnings before interest, tax, depreciation and amortization (Ebitda) was down 4.7 per cent to £148.8m as a result of Sport Direct’s purchase of House of Fraser, while underlying Ebitda excluding acquisitions rose nearly 15 per cent.

In its first 11 weeks under the ownership of Sports Direct, House of Fraser lost £31.5m.

The figures

Underlying profit before tax dived 26.8 per cent to £64.4m in the half-year to October.

Net debt climbed to £505.5m, compared with £471.7m in the same period last year.

Group underlying earnings before interest, tax, depreciation and amortization (Ebitda) was down 4.7 per cent to £148.8m as a result of Sport Direct’s purchase of House of Fraser, while underlying Ebitda excluding acquisitions rose nearly 15 per cent.

Sports Direct also said that sports retail revenue in the UK and Europe fell 0.2 per cent and five per cent respectively as a result of store closures.

However, the British sportswear retailer reported a 15.5 per cent rise in first-half core earnings, excluding acquisitions, amid efforts to move its brand upmarket.

In its first 11 weeks under the ownership of Sports Direct, House of Fraser lost £31.5m.

Why it's interesting

Mike Ashley’s summer spending spree has come at a cost. Despite cheap retail goods bolstering Sports Direct during a period of tough trading conditions, the retail tycoon’s acquisition of House of Fraser has dented earnings.

Full-year earnings that include the department store chain are set to fall behind last year’s results, despite growth in the Sports Direct business.

The news comes several months after Sports Direct posted a sharp fall in its annual profits, partly as a result of taking an £85m hit for its 30 per cent stake in Debenhams.

What Mike Ashley said

Mike Ashley said: “Outside of the House of Fraser acquisition the Sports Direct Group has had another successful period reporting a 15.5 per cent growth in underlying Ebitda to £180.3m. This is impressive in the context of the current struggles in the high street and shows our elevation strategy continues to go from strength to strength. Excluding House of Fraser we anticipate we will be within our previously communicated underlying EBITDA growth range of 5-15% by year end, including House of Fraser we expect to be behind last year's result.”

Ashley added: “I have made my views clear that I believe the previous House of Fraser senior management team traded the business whilst it was insolvent for a long time, this means we have significant challenges ahead in turning House of Fraser around.”