Blacks profits down after accounting discrepancies uncovered

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The outdoor specialist Blacks Leisure suspended the managing director of its boardwear subsidiary Sandcity yesterday after discovering £2m of discrepancies in its accounts.

The overstatement of profits at Sandcity over the past two financial years means that Blacks Leisure Group's profits for the financial years to February 2008 and 2009 will be £1m lower than expected.

Darren Spurling, the head of Sandcity and also a main board director of the company, was suspended while the company continues its investigations.

Chief executive Neil Gillis, the former head of Esporta who was brought in to run the business in November, imm-ediately launched a review, which led to the discrepancies being uncovered.

"It is annoying that this has happened now, just when the recovery programme was progressing," Mr Gillis said, adding that the motive for the irregularities, an "overstatement of margins", was as yet unclear. "It could be deliberate or it could be incompetence," he said. "I have been through the business in quite a lot of detail, and although you cannot rule things out, I would hope there are no other discrepancies in the group."

He added that budgets for the new financial year had been based on the incorrect figures and would have to be cut by £1m.

"Clearly, this is not helpful to the new chief executive and there will be some unease regarding the extent of the problem," said Sanjay Vidyarthi, an analyst at Dresdner Kleinwort.

Shares in the company plummeted by as much as 15 per cent to a 12-year low in early trading, as investors digested the news. But the stock later recovered and Blacks closed the day flat at 131p, after falling as low as 112p.

Mr Gillis said he had thought it "a little bit odd" that Sandcity, which distributes and retails the O'Neill brand, was run as a separate business to Freespirit, its other boardwear division, and this prompted a closer inspection. Mr Gillis now plans to close the Washington, Tyne and Wear headquarters of Sandcity and merge the two businesses. A consultation process with employees who may be affected began yesterday. Meanwhile, a team of investigators are going through all the accounts of the past two years with a fine-toothed comb.

The news of the irregularities is just the latest blow for Blacks, which has had a turbulent time over the past year. Its former chief executive Russell Hardy stood down last June after profits fell from £21m to £100,000. Following this, the company's chairman, David Bernstein, had a public spat with Sports Direct's billionaire founder, Mike Ashley, who owns a 29.9 per cent stake in Blacks. Mr Ashley threatened to oust the board unless it agreed not to sell Freespirit, which was under review and which he believed was one of the strongest parts of the business. Blacks later decided to keep the snow- and surfwear chain.

Mr Gillis said he had called all major shareholders when the news of the irregularities was announced and all were understanding. He added that he had met with Mr Ashley on a number of occasions. "He has been very supportive," Mr Gillis said. "He is very keen to see the business improve again as he has got a lot of money in it."

Mr Gillis is keen to reposition Blacks' different chains, which include Millets, as more fashionable and modern places to shop. Two new-format Blacks Leisure stores were launched in the past few weeks in Kensington and Holborn, in London, and they are already performing strongly, Mr Gillis said.

Outdoor specialists in the UK are out of sync with their products as the clothing ranges are "trendy and cutting edge" but they are being presented in shops that are "a bit worthy and old-fashioned", he added. But Mr Gillis intends to change this across the company's brands and present its outdoorwear in a retail environment that more accurately reflects the products.

Analysts' profits forecasts ranged from £1.7m to £2.1m for the year ended February 2008, and up to £5.7m for the year to February 2009, but these will be cut back by £1m in line with guidance.

Matthew McEachran, an analyst at Kaupthing Singer & Friedlander, said: "The relative impact of losing £1m off the bottom line is high because of where profits have fallen back to."

In January, the group revealed that the boardwear business had suffered a near-11 per cent drop in like-for-like sales over the Christmas period. However, Blacks grew by 5.4 per cent and Millets increased like-for-like sales by 7.8 per cent.

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