Sports Direct International (LSE: SPD) has been one of the FTSE 250‘s poorest performers over the past three months, dropping 14% with the index down just 1.8%. And since a peak in mid July, the shares have lost 21% of their value.
Looking back further, the Mike Ashley-led business has lost 50% of its value over the past five years. So what’s gone wrong for the UK’s largest sports retailer, can it be turned around, and are the shares a bargain purchase right now?
Tough trading
The company has suffered from the severe downturn in the UK’s high street retail sector, and a couple of bad years saw underlying earnings per share crumble by 70% to just 11.4p in 2017. Long-running controversy concerning allegations of poor working conditions at the firm’s factories haven’t helped, and shareholder discontent led to the resignation of chairman Keith Hellawell on AGM day earlier in September.
Mr Hellawell had only narrowly survived a shareholder vote the previous year, and his departure was met with complaints from Mike Ashley that shareholders had stabbed him and the company in the back. The Unite union’s Steve Turner welcomed the departure, but was moved to wonder will “his replacement stand up to Mike Ashley in the interests of workers and shareholders?“
In an investment candidate, I really like to see a company where everyone is pulling together in a positive environment: board, management, workers. I’m certainly not seeing that at Sports Direct, and that’s a big negative for me.
Profits recovering?
Having said that, although the year to April 2018 showed a big fall in reported pre-tax profit (down 72.5%) and reported EPS (down 88.3%), the underlying figures looked considerably rosier with pre-tax profit up 34.5% and underlying EPS up 74.6%.
Sports Direct has been hit by troubles at Debenhams, in which Mr Ashley has built up a near-30% holding, and what’s going to happen at House of Fraser and other retailers in which he has established a stake is hard to determine at the moment.
On the valuation front, forecasts are suggesting solid EPS gains over the next two years, which would drop the stock’s P/E multiple to 13.5 by April 2020.
That’s a little below the FTSE 100‘s long-term average of around 14, so it looks superficially attractive. But there’s no dividend from Sports Direct, while the Footsie looks set to deliver around 4% this year. On that score, I’m not seeing an obvious bargain valuation.
Too much uncertainty
Added to that, net debt more than doubled to £397m in the year to April. And though it might not look too demanding at only around 1.3 times underlying EBITDA, it’s not a trend I like to see at the best of times, and certainly not during such tough times for retail firms.
I really wouldn’t be surprised to see Sports Direct shares pick up over the remainder of 2018, and last time I took a look inside one of the company’s stores it appeared well-stocked and reasonably busy.
But the big problem for me is that I’m not seeing a clearly joined up, all-working-together company with a clear vision. For that reason, I’m staying away.
