Sports Direct shares fall 8% as temporary restructuring costs weigh on profits

<p>Sports Direct shares fell an initial 3.7% before slumping to 8% down on the day to become the worst performing stock on the FTSE 100 […]</p>

Sports Direct shares fell an initial 3.7% before slumping to 8% down on the day to become the worst performing stock on the FTSE 100 in Thursday trading after the company’s profit for the first half of the year missed market expectations.

With Sports Direct shares rallying some 13% in the last three weeks as a run up to today’s announcement – and over 300% in the last two years – expectations were high for a strong result, which has influenced the market reaction. Sport Direct needed to meet elevated market expectations for their half year results and so the risks were always to the downside in the immediate reaction to today’s numbers.

The discount sports retailer saw underlying pre-tax profit rise 17% to £146.2mn, which came in below the majority of market expectations of around £150mn thanks in part to rising temporary costs and losses associated to its acquisition of Republic. Core earnings came in at £183.3mn, which is a growth of 12.3% compared to the same period a year ago and in line with consensus estimates.

The retailer remains confident of a strong second half of the year thanks to growing demand for discounted online goods. They expect to report an EBITDA of £310mn for the full year.

Online sales came grew by 43% to £158mn and contributed to almost 16% of total sales compared to 12.5% a year ago.

Correction nothing to fear

The key headline here is that Sports Direct continues to report strong numbers but because market expectations have become so elevated, this is what has borne today’s market disappointment. In truth, with the bar set so high, the risks were always to the downside on their numbers yet in the long term. Today’s 8% decline in shares is perhaps nothing to get overly concerned about at this stage.

Indeed if today’s losses start to trigger a 10% plus corrective decline in share prices many investors may well see this as a buying opportunity given the positive sentiment that continues to surround the firm. There have been four corrections of more than 5% in the firm’s share price over the past 18 months. A price correction of between 5%-10% is healthy for the long term bullish trend of a stock and therefore is not something investors should currently fear. Indeed considering how far the stock price has rallied over the past two years even a correction of 10%-15% may not be as troublesome as other stocks would face were they to fall by that margin.

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