Shambles at Sports Direct

published 1 August 2019

Mike Ashley, founder of Sports Direct International Plc © Chris Ratcliffe/Bloomberg via Getty Images — Mike Ashley: a new low

Mike Ashley wanted to save the high street, says Hannah Uttley in the Daily Mail. Yet the Sports Direct (LSE: SPD) mogul's dreams of returning struggling chains such as House of Fraser to past glories is "turning into a nightmare". Last week's biannual results "set a new low" for Ashley's relations with the City, says Ashley Armstrong in The Times. Management admitted that House of Fraser, which was purchased last year for £90m, may be in "terminal decline". Ashley lashed out at retail foes, restructuring advisers and the government. He also made a "curious recommendation that chief executives should have drug tests to protect them from blackmail". To top it all, he revealed that Sports Direct has been served with an unexpected £600m Belgian tax bill, equivalent to more than five times his firm's profits. The shares slumped by a fifth and have now lost 77% of their value since peaking at 922p in 2014.

The firm has also fallen out with its accountants. Grant Thornton intends to quit as auditor following the tax-bill fiasco. That is no surprise, says Lex in the Financial Times. Sports Direct has been snapping up struggling high-street businesses left, right and centre, making accounting a difficult task. Falling operating profit margins and cash flow suggest that the resulting "jumble" has "stretched management's capabilities" too. The days when Sports Direct was a "fast-growing investor darling" are over.

Even by Ashley's "own bizarre standards", the latest "omnishambles is a new low for UK plc", says Christopher Williams in The Daily Telegraph. Senior management have been jumping ship Friday brought news that the chief financial officer is also leaving and a £5.35m pay package for Ashley's future son-in-law has stoked further criticism. Sports Direct is now "almost a case study in failed corporate governance", says David Cumming of Aviva Investors. "Anyone who cares about proper oversight, control and governance... shouldn't really be an investor in this company."

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Ashley's City critics could be getting carried away, says Joe Curtis in City AM. Analysts at Liberum, an investment bank, maintained a buy rating on the shares, noting that the group's attempts to move upmarket from its "stack 'em high, sell 'em low" roots is yielding results. "The core business has been robust against a challenging backdrop and the balance sheet remains strong." Recent failures may encourage Ashley to put empire-building on the back-burner and focus on the retail basics at which he excels, adds Neil Wilson of markets.com.

The question now is whether brave investors will be able to buy into Sports Direct for much longer, says The Guardian. Ashley already owns more than 60% of the business. Friday's excruciating "farce" was "neither typical nor becoming of a listed business". Despite protestations to the contrary, "Ashley must be considering taking the business private and probably has the liquidity and financial contacts to make it happen".

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Company	Sector	Short interest on31 July (%)	Short interest on8 July (%)
Kier Group	Construction	11.5	9.9
Anglo American	Mining	9.9	9.6
Debenhams	General retailers	9.5	9.5
AA	Support services	9.4	10.5
Arrow Global	Financial services	8.8	9.9
Babcock International	Engineering	8.3	9.9
IQE	Semiconductors	8.3	8.1
John Wood Group	Oil services	8.1	9.7
Thomas Cook	Travel	7.9	10
Pearson	Media	7.6	NEW ENTRY

These are the FTSE 100's ten most unpopular firms, based on the percentage of stock being shorted (the "short interest"). Short-sellers aim to profit from falling prices, so it helps to see what they're betting against. The list can also highlight stocks that may bounce on unexpected good news when short-sellers are forced out of their positions. Pearson is the sole new entry this time. It hopes a shift to digital publishing will combat the falling sales of printed textbooks as students turn to the second-hand books market and online resources. This is especially true of the US, which accounts for two-thirds of sales.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.