Saturday 26 May 2018

Sports Direct might need duvet days for Ashley

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John Lynch

I've always been a little uneasy about entrepreneurs who use their own personality to determine the image of the company they lead. There is no shortage of examples, here and elsewhere, of people who become the embodiment of their businesses. When it works, as it does in the case of say, Richard Branson's enterprises, it can be a brilliantly successful public relations tool. But when the entrepreneur becomes a lightning rod for political and regulatory controversy, it just might be time to duck back under the duvet.

That may indeed be good advice for the founder of the company we are analysing today, Sports Direct, Britain's biggest sportswear retailer. Whether the businessman in question, the company's deputy executive chairman Mike Ashley, would heed such advice is probably unlikely. Ashley recently surfaced with off-the-cuff mutterings about the company 'not trading very well'. To some, this was an unofficial profit warning, but the company quickly issued a clarification before the regulator loomed into view. The shares immediately slumped. And it's not the first time Ashley's got up the backs of the City of London.

Starting from scratch, the 55pc owner has led the company to now controlling 660 stores, 440 in the UK, 27 in Ireland and the remaining in Belgium, Austria and the Baltic States. Its outlets are crammed with tracksuits, trainers, football shirts and sports gear of every description. If you wanted to find jeans or a handbag, it can handle that too. The group owns and manufactures sports brands like Karrimor rucksacks, Slazenger tennis gear, Lonsdale boxing equipment, but Adidas and Nike account for a considerable chunk of sales.

Ashley's difficulties with the London Stock Exchange came soon after he floated the company. Though the stock was launched at 300p, the first set of results disappointed and the price crashed. Investor relationships were not helped when the boss accused the institutions of being a bunch of cry babies. Nevertheless, those who persisted over the near-decade since flotation were well rewarded. The shares reached a record high of 900p in early 2014.

Ashley has found many ways to annoy the City grandees. He bought and sold shares in other retailers like Debenhams and the House of Fraser, irritated his shareholders in seeking large incentives for senior executives (including himself) and is currently being sued by his former strategic director for £14m. He also became the owner of Newcastle United, and relegation-threatened Geordie fans seem to have the same affection for him as the City does. On the flip side, Ashley has built up an enterprise with a market value of £2.4bn. Group sales last year were £2.9bn, operating profits almost £300m, with the UK accounting for 80pc of sales and profits.

The company's retail business generates revenues of £2.4bn. During the year, it entered the fitness business, buying the LA Fitness chain. It also expanded its interests in Ireland with the takeover of Heatons.

If someone had London enemies in striped suits and St James's Park enemies in striped football shirts, the sensible thing might be to keep one's powder dry. Not so for Mike Ashley. He has taken on Westminster. He refused an invitation to appear before a Westminster select committee, to answer charges that his staff are being paid less than the statutory minimum wage.

While parliamentary hearings can be difficult, failure to attend only harms the company - even Rupert Murdoch recognised this. Sports Direct's shares have been marked down 40pc in the last year to 390p, trading on a price earnings multiple of only eight. In contrast, its rival JD Sports saw a 46pc increase in profits and 130pc rise in its share price; something doesn't add up for Sports Direct. Some believe the company will bounce back, others are not so sure. However, I would not be a buying at this time.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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