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Sports Direct results loom

First-half earnings from Sports Direct could provide an early Christmas present for shareholders, if the company can point to decent progress in its continental operations.

Sports Direct logo
Source: Bloomberg

Mike Ashley has hit the headlines of late with ambitious bets on the likes of Tesco and Debenhams, but these attention-grabbing moves should not distract attention from Sports Direct’s results.

Indeed, the worry is that Mr Ashley’s adventures have meant that he is not keeping his eye on the European business, which is now crucial to Sports Direct’s expansion. If the company has to admit to a slowdown in Europe that goes beyond what might have been expected thanks to the dire economic performance of the region, then shareholders would be justified in questioning the company’s strategy.

As an investment, Sports Direct inevitably invites comparison with its retail peer Next. Although they serve different markets, the firms are both giants in their field, crushing all opposition. The difference is that Next has a powerful online offering, Next Directory that has powered its growth in recent years and made the company one of the most solid performers in the FTSE 100.

Sports Direct is attempting to build its own online division. So far the early results are promising, but again Sports Direct needs to emphasise that it has not lost focus with its diversions into Tesco and others.

On a valuation basis, Sports Direct looks to be the slightly less attractive proposition. For starters, there is no dividend yield, which significantly diminishes the appeal when compared to Next, which has a payout of 2.2% and has reiterated its commitment to buying back shares as well.

The current PE for Sports Direct also looks a bit high, at 22.05 versus a much more modest 16.48 for Next. This indicates that expectations for Sports Direct’s performance are much higher, boosting the risk of disappointment. On the positive side however, margins look to be significantly below the sector average, which gives room for growth and supports the slightly higher valuation.

Having underperformed the FTSE 100 so far this year, the technical picture still looks gloomy. The shares have run out of momentum at £7, having broken out of the descending channel at the beginning of the month. They also remain below the 200-day moving average, although a modest turn higher in the 50-DMA offers some hope.

The hourly chart shows a decent trend running from 26 November, with the weakness of 9 December offering a possible entry point as the shares test oversold territory on the hourly chart. Sustained weakness following the numbers could lead to a test of the low of November around £6.20, while a close back above £7 takes us back in the directon of the September high at £7.40 and then the July peak just below £7.70

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