Managers of Sports Direct International, the leading British retail and wholesale group, were lampooned by investors after the company issued a puzzling statement on April 26 that was widely interpreted as a profit warning. Investors had already been worried by the slide in the price of Sports Direct’s shares, which were floated at 300 pence in February but dropped to only about 220 pence last month, reducing its market capitalization from about £2.2 billion to £1.6 billion (€2.4bn-$3.2bn).
The update for the financial year ended on April 29, 2007 indicated that Sports Direct’s EBITDA before exceptional items would be “broadly in line with latest market expectations,” which have been generally downgraded over the last weeks. It further stated that “sales growth in the main UK retail business is slower than earlier in the year, but remains positive, and overheads continue to benefit from the move to the Shirebrook Distribution Centre.”
In line with the analysis provided in its prospectus, Sports Direct added that “pricing in the UK sports retail sector and in the company’s main UK retail business has stabilized, and increased in some areas.” This “main UK retail business” was defined as all UK retail operations other than e-commerce and two recently acquired chains, Original Shoe Company and Streetwise.
While some analysts continue to believe in Sports Direct’s business model, which has been highly successful so far, others have downgraded their forecasts by between 9 and 15 percent for the year just ended, and by up to 20 percent for the year just started. Some of them pointed to the lack of visibility on the company’s results, which was highlighted by the bizarre lack of figures in Sports Direct’s statement. The company will not publish its full-year results until July 24.
Analysts are also worried about the apparent deterioration of the company’s relationship with some leading suppliers. As reported earlier, both Nike and Adidas have been reducing the ranges they are offering to Sports World stores. At the same time, JJB Sports, Sports Direct’s most direct competitor, has been building up its relationship with the same brands by setting up multiple shop-in-shops for them. They started appearing last year, and JJB confirmed while issuing its results last month that it would roll out the shop-in-shops at high speed. It should have 184 of such Nike or Adidas areas in place by the end of July, and up to 600 next year.
However, the stock market has been most concerned about Sports Direct’s erratic ways as a listed company. Just as Sports Direct issued its statement, it was revealed in The Daily Telegraph that it had failed to appoint a broker. It had been assumed that Merrill Lynch was the company’s broker, but it emerged that the bank never formally received a mandate and merely provided advice to Sports Direct, which is highly unusual. Other British newspapers reported that the relationship between Sports Direct and Merrill Lynch was strained, which explained the bank’s cagey behavior regarding the company since its float.
Sports Direct never had an investor relations agency, and since it fired Tulchan shortly after the float, it hasn’t had a public relations agency either. Furthermore, Sports Direct’s chief financial officer, Bob Mellors, was accused of failing to turn up at appointments with analysts, while persistent calls were not returned (a problem shared by SGI reporters).
Summing up the frustration, Morgan Stanley even issued a note titled “Earth Calling Shirebrook.” In its statement to the stock exchange, the company said that it expected to announce the appointment of both IR and PR advisors this month, but failed to mention the broker.
David Richardson, Sports Direct’s non-executive chairman, has apparently encouraged the company’s directors to talk more openly to journalists and analysts. The company’s reluctance to do so was chiefly blamed on the maverick ways of Mike Ashley, the entrepreneur behind Sports Direct, who almost single-handedly ruled over the company since he founded it. Officially appointed as deputy executive chairman, he made £929 million (€1,370m-$1,850m) by selling off 43 percent of Sports Direct in February, but he still is its majority shareholder.
In a rare interview with The Sunday Times, Ashley admitted that he had messed up the floatation due to his lack of experience on the stock exchange. He said he was “very green” when Sports Direct was launched and, among other errors, he should have had an investor relations agency in place a few months ahead to allow it to better understand the company. He added that the trading update had been meant to reassure investors, although it obviously had the opposite effect.
Meanwhile, there is abundant speculation that Ashley is attempting to poach Barry Bown, the very sharp chief executive of JD Sports, by offering him a stupendous pay package. Bown reportedly has basic annual earnings of £203,000 (€300,000-$405,000) at JD. Leading executives at Sports Direct are faring much better, as it emerged that five of them would be sharing a £25 million (€36.8m-$49.7m) bonus this week.