• H1 earnings fall 25.1% to GBP140.2m (US$177.9m)
  • Gross margin narrows 450 bps
  • Net sales up 14.2% to GBP1.64bn

UK retailer Sports Direct has issued a warning for the year ahead after booking a drop in first-half earnings as a result of property investment costs and a reduction in assets.

Reported profit before tax fell 25.1% in the six months ended 23 October to GBP140.2m (US$177.9m) from GBP187.3m a year earlier. Gross margin narrowed by 450 basis points to 40.4% from 44.9%.

Group revenue increased 14.2% on a currency neutral basis, excluding the impact of the acquisition of Heatons to GBP1.64bn. UK retail sales were up 5.6%, while international sales jumped 44.5%.

The company says it expects existing strategic challenges and currency headwinds to continue to adversely impact its financial performance over the medium term.

"The last six months have been tough for our people and performance," says chief executive Mike Ashley. "Our UK sports retail business continues to be the engine of Sports Direct, but our results have been affected by the significant deterioration in exchange rates, and our assessment of our risk relating to our stock levels and European stores performance.

"We continue to elevate our sports retail proposition for our key third-party brand partners and customers, as we progress towards our medium to long term goal of becoming the 'Selfridges' of sports retail. We are changing our retail channels for customers in the UK, and we will be changing our approach to our customers in Europe, which will take time."

Emily Stella, senior analyst at Verdict Retail, notes the scandal-hit sports fashion retailer blamed its sharp drop in profits on a failure to hedge in the aftermath of the referendum. But she also says the retailer's "dismal financial results...are also a fallout of disruption within senior management, with the then CEO Dave Forsey resigning in September, followed by CFO Matt Pearson stepping down in October."

The second half of 2017 is unlikely to be any rosier for the retailer, Stella adds. "Amid continued negative media coverage – the latest of which sees founder and CEO Ashley being sued by a Merrill Lynch banker over share deal concerns – and sustained currency headwinds, the retailer's financial performance will inevitably suffer.

"With this in mind, Sports Direct will need to focus in 2017 on rebuilding its reputation and nurturing its (surprisingly) loyal people; the retailer has committed to underwrite the value of the share awards to staff that are due to vest in 2017."