Sports Direct profit dragged down by Debenhams

By James Davey

LONDON (Reuters) - British retailer Sports Direct (SPD.L) booked an 85.4 million pound charge for a disastrous investment in department store chain Debenhams (DEB.L), raising questions over its strategy of taking big stakes in other businesses.

The Debenhams hit took the shine off a better-than-expected jump in Sports Direct's core earnings in 2017-18, sending its shares down as much as 11.6 percent on Thursday.

Some 61 percent of Sports Direct's equity is owned by its billionaire founder and chief executive Mike Ashley, who also owns Premier League soccer club Newcastle United.

The group has a 29.7 percent stake in Debenhams, whose shares have slumped 72 percent over the last year after a series of profit warnings.

Sports Direct has several other significant equity investments, including in House of Fraser, French Connection (FCCN.L), Game Digital (GMDG.L), Findel (FDL.L) and Goals Soccer Centres (GOAL.L).

"It’s hard to fathom the precise strategy at play here," said Laith Khalaf, analyst at Hargreaves Lansdown.

"With such a maverick in charge of the business we can continue to expect the unexpected, and that’s not a brand markets tend to wear gladly," he said.

Jon Kempster, Sports Direct's chief financial officer, defended the policy.

“The strategic investment side is part of our being, it’s part of our DNA that we try and drive relationships through investments,” he told Reuters, also pointing out that in the 2016-17 year the group made over 150 million pounds from the disposal of shares in rival JD Sports Fashion (JD.L) and 80 million pounds from the sale of the Dunlop brand.

Prior to Thursday's update Sports Direct's shares had increased 45 percent over the last year as Ashley's trading strategy to smarten up its stores and sell more premium products from its four key suppliers - Nike (NKE.N), Adidas (ADSGn.DE), Puma (PUMG.DE) and Under Armour (UAA.N) - to better compete with rivals JD Sports and Decathlon, gained some traction.

The firm has dubbed this its "high street elevation strategy."

Ashley's stated desire is to make Sports Direct the "Selfridges of sport", emulating the status of the department store on London's Oxford Street.

CORE EARNINGS GROWTH

Shares in Sports Direct were down 6.8 percent at 407 pence at 1004 GMT, valuing the business at 2.19 billion pounds.

Its reported pretax profit in 2017-18 fell 72.5 percent to 77.5 million pounds, partly reflecting the Debenhams charge, on revenue up 3.5 percent to 3.36 billion pounds.

The group posted underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of 306.1 million pounds in the year to April 29 - ahead of analysts' average forecast of 296.8 million pounds, according to Reuters' data, and 272.7 million pounds made in 2016-17.

The firm, which has been heavily criticised for its past treatment of workers, its financial disclosure and poor corporate governance, in December forecast full-year core earnings growth of 5-15 percent.

"The elevation strategy continues to exceed expectations," said Michael Murray, who has the title head of elevation.

"As the property pipeline and brand relationships accelerate, we are confident in achieving between a 5 percent and 15 percent improvement in underlying EBITDA for the coming financial (2018-19) period," he said.

Analysts at Peel Hunt, who have an "add" stance on the stock, said that target looked achievable, given Sports Direct has likely made a strong start to the new financial year on the back of England's run to the soccer World Cup semi-finals and Britain's prolonged heatwave.

(Editing by Paul Sandle/Keith Weir/Kirsten Donovan)