Sports Direct warns on profits

Another day and another episode of the Sports Direct soap opera gets an airing. Hot on the heels of yesterday's critical report into working practices at his warehouse in Shirebrook, Mike Ashley's cheap and cheerful sports chain has now warned of a big fall in profits this year.

Expect a 21% slump in underlying cash profit to £300 million in the year to April 2017, the billionaire owner of Newcastle United FC said ahead of today's boisterous AGM and tour of the "Dickensian" site near Mansfield. It's why Sports Direct shares lost more than 11% Wednesday.

However, even these profit forecasts are dependent on sales growth of at least 9%, margin decline of no more than 275 basis points, a rise in operating costs capped at 8% and no "unforeseen significant items" or big acquisitions.

Cantor Fitzgerald analyst Freddie George has slashed pre-tax profit expectations from £290 million to just £205 million, although his cash profit number is still above guidance at £313 million. On revised earnings per share (EPS) estimates of 26.3p, Sports Direct trades on 12.6 times forward earnings, a significant but justified discount to more successful rival JD Sports.

Sports Direct shares had collapsed by two-thirds from highs over 800p a year ago, hitting a target of around 223p predicted here by technical analyst Alistair Strang has long ago as January. They've bounced 40% since the July lows, however, as investors bet that business was untroubled by Brexit and on a favourable outcome from the Working Practices report.

Well, Ashley has finally admitted that its "time for change". In fact, it's the title of a presentation to shareholders today. In it, he repeats that the board "deeply regrets and apologises for" serious shortcomings identified in the working practices report.

There's also a further promise to suspend the so-called "six strikes" policy immediately, offer casual retail staff guaranteed hours instead of "zero hours", better the national minimum wage, and initiate a 360-degree review over the next 12 months, including working practices and employment model, corporate governance and corporate reporting and communications.

However, just in case there was any doubt about who's in charge, Ashley, who still owns 55% of the company, has refused the resignation of chairman Keith Hellawell who, along with the entire board, is accused of being incapable of holding Ashley to account. Major shareholders, including Legal & General, have voted against Hellawell's reappointment for the third year in a row.

Sacha Sadan, director of corporate governance at Legal & General Investment Management said: "At absolute minimum, we believe the current chairman should step down immediately and an external, independent appointment made to oversee management and protect the interests of all stakeholders – including employees, suppliers, and shareholders."

And there's also no backing down over the eyebrow-raising appointment in January of Michael Murray, Ashley's daughter's 26-year-old boyfriend, as head of the company's property empire.

It's clear, then, that while Sports Direct is moving in the right direction, the changes have been very much forced on the company, and it remains to be seen whether Ashley really is capable of moderating his unorthodox business practices.

At least decisions will come under public scrutiny, given he's dismissed rumours that he's taking the company private - certainly an option which would at least divert much of the unwanted attention. Do as he's promised and it should spell good news both for employees and shareholders alike.

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