Trends & Features

Will the problems faced by Sports Direct benefit the independent trade?

By Paul Clapham

Fans of Newcastle United will by now be sick of the chant: “Going down, going down, going down”. By the time you read this, it may already be a formality. What is less likely to be turned around and which could well be going down for the foreseeable future is Sports Direct, also owned by Mike Ashley.

Anyone who has the misfortune to be a shareholder in Sports Direct is entitled to weep into their Newcastle Brown Ale. By any measure, the management team, led by Ashley, have destroyed shareholder value over recent time. At the time of writing, shares have fallen by more than half since their peak during last summer, from 805p to 379p.

In addition to this, Ashley was called before a parliamentary committee to answer charges that his business was paying staff below the minimum wage. He failed to appear. He has also refused to appear at the next scheduled meeting of said committee in June.

Relegated from the FTSE 100
All in all, this is not the standard expected of management of a FTSE 100 company. Sports Direct has recently suffered the indignity of being relegated to the FTSE 250 Index. This doesn’t necessarily represent the same nightmare as relegation from the Premier League, but it’s not a vote of confidence. The threat to Sports Direct’s future won’t go away without some serious reappraisal of how the business is run.

In an interview with The Times on March 21, Ashley admitted things were going wrong. “We are in trouble, we are not trading very well,” he was quoted as saying. “We can’t make the same profit we made last year.” Let us, therefore, give the man some credit for openness.

One major shareholder said: “He doesn’t dress up bad news when trading has been tough. They tell it like it is. That’s as it should be.” However, readiness to accord that credit is likely to be in short supply in the City.

Since this was price sensitive information, it surely should have required an official statement to the stock exchange ahead of any media coverage, but as one anonymous analyst said to the FT: “This is not a company like most others”.

Reaction in the City
The effect of Ashley’s statement was all too predictable. On March 22 shares in the company fell 10.5 per cent (that fall is included in the above figures). City commentators have reacted with little short of amazement.

Clive Black of Shore Capital said: “I would have thought Mike Ashley’s major institutional shareholders will have a certain degree of apoplexy.”

What worries the financial experts above all is that Ashley blamed the company’s problems on MPs’ criticism of Sports Direct and the subsequent media coverage.

Retail analyst Nick Bubb said: “It was extraordinary he admitted that the business was in trouble, but it was even more extraordinary that he apparently believes all the problems are caused by MPs and the press. If he really is that deluded, the City is right to be worried.”

Please note that in the same week Next put out a profit warning – through the usual channels – and saw its share price fall dramatically. Next has been one of the stock market’s darlings for a long time, so no one is calling for CEO Lord Wolfson’s head. Yet.

Short and long-term effects
What is the likely upshot, both in the short and long term? In plenty of public companies, Mike Ashley would probably be staring down the barrel of a P45 by now. That is next door to impossible in this case, since he holds 55 per cent of the shares. He could shrug off a vote of no confidence or similar.

I predict that those institutional shareholders (the pension funds, life assurance companies and unit trusts) will be reading the riot act to Ashley, although I doubt it will do them a lot of good. The fact is Ashley is a maverick and you have to take the rough with the smooth with mavericks. He will be able to point out that Sports Direct shares have been overall a good investment for them, unless the price goes on falling steeply.

There may well be changes in how Sports Direct runs its City PR activity. Ashley claims to prefer to be under the radar, but felt compelled to speak out in this case. Since the short-term effect of the above events has been that his personal wealth has dropped significantly, he might agree to have a PR ‘minder’, although I suspect that would be a tough role indeed.

I have yet to read the suggestion in the finance pages, but could Ashley decide to take Sports Direct private? When he became disillusioned with the City, Richard Branson did exactly that with Virgin and it’s largely prospered.

4 ways independents could benefit
1. If there was a Sports Direct near my store, I would make sure to have a copy of that story in The Times headlined: ‘We’re in trouble, admits Sports Direct’s Ashley’. I’d be inclined to display it in-store.

It’s not likely to change the minds of someone wanting a pack of running socks, but it could impact sales of premium, long-term purchases such as top-end tennis racquets, where you want equally long-term back-up and after-sales support.

2. Could the business go bust and so even up the playing field? Personally, I’d say it’s 1000-1 against. Keep an eye on that share price though, because my gambling instincts are not famous.

The company might have to pull in its horns. Depending how deep Sports Direct is in trouble, it might mothball or cancel planned new stores. It might need to sell any land it’s acquired for expansion to help mend the balance sheet. It might decide to close some stores. Any of those events could benefit independents on a localised basis.

3. Do a regular stock check at your nearest Sports Direct. When Tesco was firefighting, I noticed as a customer some delistings and heard other customers complaining about the same thing. It’s an obvious way to reduce costs or improve overall margin in the short term.

Will Sports Direct go down the same route? It’s quite likely. I doubt suppliers will tell you they have lost that account, or part of it, but if you suss out those delistings you could have a nice new niche market.

4. Business commentators writing about Tesco’s meltdown consistently said it had gone for ‘big is beautiful’ and then discovered the customer no longer thought so.

If this accounts for the problems at Sports Direct, what better news could there be for independents? Sports Direct can never be small, convenient, friendly and expert, since it’s structured to be essentially the opposite.

Also, since the company sells on price and availability it, more than other retailers, is in competition with internet sales. It looks like independent sports retailers are at the cutting edge of where retailing is going – small is beautiful.

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