RETAILER Sports Direct saw its stake in embattled department store Debenhams bite into its annual profits, sending shares tumbling by 11 per cent in early trading yesterday.

The company’s pre-tax profits slumped 72.5 per cent to £77.5 million for the year to April 29, down from £281.6m the previous year. Sports Direct, headed by founder and chief executive Mike Ashley, said the drop was partly due to a £85.4m hit the retailer took on the value of its a 29.7% stake in Debenhams, whose shares have plunged 72% over the last year after a series of profit warnings.

Sports Direct said its UK sales were down 2% over the year to £2.2 billion while its wholesale and licensing division saw revenues tumble almost 23% to £186.3m. However, total group revenues rose 3.5% to £3.4bn, boosted by sales outside Europe.

The retailer, which faces football club Rangers in court later this month in a row over the sale of the team’s kit, said it continued to make “good progress” in elevating its retail proposition to improve customer service.

Chairman Keith Hellawell said: “Our new generation of flagship stores continue to outperform our expectations.”

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He added that the results had come in at “the top end” of expectations, stating: “Underlying profit before tax was up 34.5% to £152.9m, largely as a result of maintaining a strong trading performance in the UK as we undergo the strategic shift to the elevated store and online offering, while starting to see the benefits of increased efficiencies in the UK and Europe.”

Mr Hellawell added that in terms of statutory reporting, the fall in pre-tax profit arose “predominantly from the profit on sale of the Dunlop business and the profit on the sale of JD Sports shares included in the results for the prior period, and the recognition of the net losses on our strategic investment in Debenhams in the current period”.

Sports Direct was named among the 10 UK companies with the biggest reputation improvements during 2017-18, he said, and last month it was ranked ahead of companies like Apple and John Lewis in an index of international retailers, published by Loqate GBG in partnership with Planet Retail RNG and Retail Week Connect.

“While there is no room for complacency, it is refreshing to see this independent recognition of the work we have undertaken to ensure that our working practices and corporate governance are aligned with our values,” said Mr Hellawell.

He also hit out at commentators who “in the past have sought to portray Mike Ashley as a pantomime villain”, and said: “Since Mike became chief executive, the company has initiated a process of transformation to the benefit of all stakeholders.” Mr Ashley also owns Premier League club Newcastle United.

At Hargreaves Lansdown, analyst Laith Khalaf said that Sports Direct’s strategic investment in Debenhams had cost the company “dearly”. He said: “The department store’s share price has collapsed by 70% over the last year – that’s caused an £85m blot on the income statement, which now shows profits are about a quarter of what they were last year.

“Sports Direct now owns 29.7% of Debenhams, just under the 30% threshold which would require a formal takeover bid,” Mr Khalaf added. “The company has a string of such ‘strategic investments’, which also includes House of Fraser, French Connection and Goals Soccer Centres, and it’s hard to fathom the precise strategy at play here.

“Looking beyond the impact of subsidiaries and acquisitions, things aren’t great in the main UK business, but then given current trading conditions that’s to be expected.”

However, he said that Sports Direct was in a strong position because “it is the last man standing on the high street in its particular market”, and suggested that England’s better-than-expected performance in the World Cup should have helped boost confidence.

But Mr Khalaf warned: “With such a maverick in charge of the business we can continue to expect the unexpected, and that’s not a brand markets tend to wear gladly.”

Alasdair Ronald, senior investment manager at Brewin Dolphin Glasgow, said: “Despite very difficult conditions for retailers, Sports Direct has managed to increase group revenues by 3.5%."

He said it was still too early to say whether the company has achieved Mr Ashley’s stated aim of turning Sports Direct into "the Selfridges of sports retailing" and noted that "these results provide a mixed picture for the business".

But Mr Ronald was largely positive, stating: "There are some signs the decision to move upmarket and give more space to branded goods is paying off, with strong underlying profits.”