Pound crash: Sports Direct profits slashed by £15m after currency bet backfires

Company took out hedge to protect itself but it had the opposite effect, and profits may be cut by further £20m if sterling remains weak in 2017.

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The Independent Online

Sports Direct announced its profits would take a £15m hit from the pound’s ‘flash crash’ on Friday after a currency hedge went wrong. The retailer said warned it would lose a further £20m if the pound remained at $1.20 for the year. 

Sterling was trading at $1.24 on Friday, having briefly hit $1.18 after a dramatic 6 per cent drop in two minutes last night.

Sports Direct had expected profits of £300m in 2017, based on a pound/dollar exchange rate of $1.30, but in a statement on Friday the company said “extreme movements overnight” in the rate would result in a “negative impact of approximately £15m”, it said in a statement on Friday.

Shares in the company fell as much as 12.5 per cent on the news.

The under-fire retailer, which has been hit by scandals over its treatment of workers and failings in its corporate governance, said a bet it had placed to protect it against unfavourable currency movements had backfired. 

A hedge placed as a precaution after Brexit caused the pound to slump in June, was triggered when the exchange rate went even lower than the company had expected. The pound briefly crashed through through the $1.19 level overnight, apparently activating a £15m payment on the hedge.

Sports Direct said on Friday: “Extreme movements [in the currency markets] overnight resulted in a crystallisation of [the hedge] rate at 1.19, resulting in a negative impact of approximately £15m," on full-year profits.

Sports Direct had already said in June that its profits would be negatively affected by the fall in the pound after the Brexit vote. Sterling has lost more than 15 per cent of its value since the referendum, making imports more expensive. 

How the pound has struggled since Brexit

Last year, Sports Direct lost £65m on currency movements as the pound weakened against the euro.

The embarrassing announcement comes after a tumultuous few months for the company. Last month its chief executive Dave Forsey stepped down to be replaced by founder Mike Ashley. It has not had a permanent finance director since Bob Mellors stepped down in December 2013.

The Bank of England said today it was investigating the cause of the “flash crash”, the cause of which remains a mystery. Experts have speculated algorithmic trading, run by computers which can make orders in quick succession triggered a rapid sell-off, after the currency breached certain levels.

Other theories include a “fat finger” error, meaning a trader accidentally placed a very large order, causing the market to move and potentially triggering other automated trades.

The true cause may never be established - the reasons behind the Black Monday crash, which wiped almost a quarter off the value of the FTSE, 30 years ago, remain unknown.

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