Sports Direct saw its profits plummet by 91 per cent last year on currency charges and the collapse of the Icelandic bank Kaupthing Singer & Friedlander.
Total revenues at the retail chain – which is 71 per cent-owned by Newcastle United's owner Mike Ashley – rose by 9 per cent to £1.37bn in the 12 months to April. UK sales topped £1bn, boosted by the opening of 27 new shops, but pre-tax earnings plummeted to just £10.7m from £119m the year before.
A major part of the problem was the trouble in Iceland. Sports Direct was forced to write off £53.1m in its accounts because stakes in rival retailers JJB Sports, JD Sports, Blacks Leisure and Amer Sports that were partly funded by KSF were frozen when the bank went into administration in October. Sports Direct is now in dispute with KSF's administrator, Ernst & Young, over ownership of the shares, but in the meantime the assets are unavailable.
"We have now concluded that, while we continue to maintain that the shares are ours and should be delivered to us, we may not directly 'control' the shares for accounting purposes," the company said yesterday. "We have therefore treated them in the accounts as having been derecognised."
The other main trouble was the weak pound. Sports Direct – which owns the Sports World, Field & Trek and Lillywhites chains, as well as the Slazenger, Lonsdale and Dunlop brands – is highly exposed to currency fluctuations because such a high volume of its products are bought in dollars. The fall in sterling pushed last year's gross margins down to 40.8 per cent from 43.6 per cent in 2007, leaving underlying earnings 8.9 per cent down at £137m. Margins in the UK were even harder hit, dropping to 42.5 per cent from 45.7 per cent. Underlying profits, excluding impairments, dropped by 20.2 per cent to £68.2m.
Simon Bentley, Sports Direct's acting non-executive chairman, said: "In a very challenging market environment, the group's relentless focus on the basics of retailing has resulted in the delivery of very creditable, solid results. We grew sales in both retail and brands divisions, while we have seen a decline in gross margin – caused almost entirely by the drop in the value of the pound, and a corresponding drop in underlying earnings."
The company scrapped its annual dividend as part of efforts to bring its £431m debt down below £400m. Dave Forsey, the chief executive, said: "Our strategy remains the right one for the business and against the tough market conditions. The board is confident that our initiatives and hard work across all areas of the group leave us well positioned for the next phase of growth."
Sports Direct owns 4.8 per cent of JJB, 13.3 per cent of JD, 29.9 per cent of Blacks and 1.5 per cent of Amer. Earlier this month, Sir David Jones, chairman of JJB, had to pay back a £1.5m personal loan from Mr Ashley, made in October 2007, that led to questions of a possible conflict of interest between the two rivals.