Over the last year, Sports Direct, led by founder and chief executive Mike Ashley, has expanded quickly. The business most notably bought House of Fraser out of administration last August and later tried to take control of Debenhams, in which it had a stake. But it didn’t stop at department stores and bought Evans Cycles, also out of administration, and Sofa.com, before unsuccessfully bidding for Findel. After the current financial year ended, it took control of Game Digital.
The delayed publication of full-year results, which were published after markets closed on Friday, give frank insights into how the Sports Direct strategy has evolved, and where the multichannel retailer goes from here – after a year in which the group has shed little light on the inner workings of the business.
The results statement also gives insights into the retail group’s financial performance. In the year to April 28 2019, Sports Direct Group reported revenues of £3.7bn, up from £3.4bn a year earlier, while reported pre-tax profits rose to £179.2m from £61.1m last time. Most of its revenues came from its UK sports stores (£2.2bn, +0.3%), while its premium lifestyle division which includes Flannels, Cruise and Van Mildert stores, grew revenue by 26.3% to £204.8m. House of Fraser revenues came in at £330.6m, while turnover from its European sports stores fell by 5.9% to £599.8m.
The retailer also said that its taxes in Belgium had been audited and that it had been billed €674m, while questions were also raised around how it taxed goods being moved into Belgium and then around the group. It says it does not expect the issue to result in material VAT and penalties being due in Belgium, and that it will now go into a fiscal mediation with the Belgium tax authorities.
In a separate statement, Sports Direct said that it now intended to buy back shares worth up to £30m. During the course of Monday, the retailer’s share price fell by 6% to 214.8p.
Sports Direct’s acquisitions over the last year seems to be driven, at least in part, by its multichannel elevation strategy. This, Ashley said in the full-year statement, grew out of the insistence some years ago by third-party brands that Sports Direct should move away from the traditional ‘stack them high sell them low’ discount model, and instead sell their wares through a new generation of stores, while connecting with the consumer across all of its channels, from social and digital to the store. It has invested in buying and fitting out “superior” retail space for its own brands including Flannels, but says it still does not get the amount of premium product it believes its stores warrant. However, it also says that were it not for its elevation strategy it would face “significant problems” in the future.
Sports Direct’s acquisition of House of Fraser out of administration last August gave it a “great deal of retail space” and “the opportunity to to enhance the offering over time and build stronger relationships with their premium third party brands.”
Sports Direct bought House of Fraser out of administration for £90m and subsequently bought the freehold of its flagship Frasers store in Glasgow for £95m as well as investing “close to” £90m in its supply chain, Sports Direct said in its full-year results. Less than a week into its ownership, the House of Fraser website was taken offline, and online orders and deliveries were subsequently cancelled. The problem stemmed from the House of Fraser warehouse, where operator XPO Logistics had refused to process orders since it had not been paid an estimated £30m that it was owed, part of more than £700m that the department store’s suppliers, including brands, lost when it went into administration. Sports Direct did not have to honour these payments since it bought the retailer out of administration.
Since then, Mike Ashley said in his end-of-year statement, “as we have continued to look under the bonnet as we integrate the business, we have found that the problems are nothing short of terminal in nature.” He said the previous management had fallen short and that while it had tried to save as many jobs as possible, and appreciated landlords and local authorities working with it to save stores, it now expected to close more stores over the next year. At year end it operated 54 stores, down from the 59 it initially bought.
“On a scale out of 5, with 1 being very bad and 5 being very good, House of Fraser is a 1,” said Ashley, “albeit we are trying very hard to turn the business around this will not be quick and it will not be easy. Even though we do believe there could be a bright future for House of Fraser, and indeed have publicised our Frasers vision which we are very excited about, if we had the gift of hindsight we might have made a different decision in August 2018.”
The retailer said that its acquisition of sofa.com was part of its wider plans for House of Fraser.
Sports Direct has bought Game, with a view to using its Belong in-store gaming arenas, on which it was already a partner, to focus on experiential retail. Its acquisition of the retailer, it says in its full-year results, “will secure Game’s future and allow it to navigate the various pressures facing it.” It also says that Game’s retail business would have been hit as the industry moves online, and that the Belong arena is not “a sufficient profit driver on its own.” It added: “Whilst Sports Direct continues to believe that the Belong concept is attractive, it can only see it as a viable business proposition as part of a wider group that can take a more holistic review of its component parts and where Belong can be combined with a focus on experiential retail creating a halo effect within stores and other physical locations.”
Ashley said that at Sports Direct “we feel most strongly about the Debenhams group failure” and listed its offers and actions during the course of Debenhams’ move into administration and then into the control of its lenders rather than of its shareholders, of whom Sports Direct was the largest. It says that while it has raised its concerns with regulators, MPs and Parliamentary Select Committes, “it appears that there is little or no will or ability amongst those bodies to properly hold any parto=y to account for these events, and we fear that this is a pattern that will be repeated seeing many more businesses fall into the clutches of these vulture funds.”
It said that Sports Direct continued to consult with its advisers to examine “what happened, who was responsible and investigate avenues to seek redress through civil and/or criminal process”.
Sports Direct is a Top150 retailer in IRUK Top500 research, while House of Fraser, Debenhams, and Evans Cycles are Leading.
Image courtesy of House of Fraser