Sports Direct shares jump on earnings outlook

Sports Direct boss Mike Ashley said on Monday he expected further House of Fraser store closures but shares in the retailer jumped more than 20% as it predicted earnings would rise this year.

Ashley, Sports Direct's chief executive and founder, said House of Fraser was "all but integrated into the group" and that he hoped the department store chain had a bright future at Sports Direct. He said there was still a great deal of work to do to turn around the business, which was purchased out of administration in 2018.

Sports Direct's underlying pretax profit rose 58% to £101.8m in the six months to the end of October and total revenue increased 14% to £2.04bn as the result of acquisitions. Excluding acquisitions and currency movements, revenue fell 6.4% as the company continued its push to move upmarket.

Ashley said several House of Fraser stores were failing to make a profit despite paying no rent and could not be sustained. He said more House of Fraser stores would close in the next year but the first half painted a more positive picture as losses at the premium business, which includes House of Fraser, dropped to £5.6m from £29m a year earlier.

He forecast group underlying earnings before interest, tax, depreciation and amortisation, including House of Fraser, would rise by 5-15% from the pre-House of Fraser figure of £339.4m. This gives a range of between £356.4m to £390.3m for the year ending 26 April 2020.

Sports Direct shares rose 21% to 435.2p at 11:10 GMT.

2019 has been a tumultuous year for Sports Direct. After buying House of Fraser in August 2018, Ashley declared the state of the business "terminal" and said he regretted the acquisition. In October he denied reports he was planning a large number of extra store closures.

Sports Direct was forced to delay annual results three times and parted company with its auditor over a €674m Belgian tax bill. Amid the confusion it continued to buy up struggling retail businesses such as Evans Cycles and Jack Wills - a strategy viewed sceptically by many investors and analysts.

The company said accountants PwC had found no evidence of material underpayment of VAT in Belgium.

Ashley said: "We are doing as much as we can to realistically save as many [House of Fraser] jobs and stores as possible. However, despite our best efforts, there are still a number of stores which are currently paying zero rent and that are unprofitable and thus not sustainable. We are continuing to review the longer-term portfolio and would expect the number of retained stores to continue to reduce in the next 12 months."

Sports Direct is rebranding itself as Frasers Group as it seeks to shed its cheap image after falling out of favour with suppliers such as Nike and enduring bad publicity over working conditions. The rebrand was approved by shareholders at a meeting on Monday morning.

Royal Bank of Canada analysts said the statement was stronger than expected but that Sports Direct faced a struggle to transform its business in a difficult retail market.

"Despite Sports Direct’s strong position in UK mass market sports retailing, we think it will be challenging to execute on its strategy to upgrade its brand and store portfolio in the UK," the analysts said. "We also think it will be challenging for it to grow outside its core sports performance business. Department stores such as House of Fraser continue to face structural pressures and we think any recovery will be slow and protracted"