Remarks the founder of Sports Direct, Mike Ashley, made in an interview with The Times last week sent the sportswear retailer’s share price spiralling downwards from 423.8p a share on 21 March to 348p on 24 March.
In four days, the firm’s market capitalisation fell from around £2.5bn to about £2bn. It was a blow Ashley would have felt personally too, as the value of his 55% personal shareholding dropped by about £250m to £1bn.
The controversial entrepreneur is berated for his apparent disdain for the City and his inability to adapt to the rigours of his firm’s status as a public company (despite it having been listed for 10 years). However, when he spoke out, he inadvertently knocked hundreds of millions off the share price after using surprisingly negative language around the business’s trading and projects.
So what exactly did he say and what is really going on at Sports Direct?
Ashley’s statement that Sports Direct was “in trouble” set the hares racing. As he opened the doors to Sports Direct’s headquarters at Shirebrook to a select group of media – in an attempt to dispel accusations that he is running a “gulag” (he’s not, by the way) – he said: “We are in trouble. We are not trading very well. We can’t make the same profit we made last year.”
His comments caused confusion, coming only weeks after the firm issued a warning that its full-year profits would now range between £380m and £420m. This was the second cut to the retailer’s profit expectations in six months. After Ashley’s remarks, Sports Direct had to clarify that its profits would now be “at or around the bottom” of the range announced in January.
Ashley is laying the blame for Sports Direct’s deteriorating trading firmly at the foot of politicians, particularly former Labour leader Ed Miliband, whom he accuses of whipping up controversy over “false accusations” that Sports Direct is mistreating its workers.
However, many in the market are questioning Ashley’s claims that negative publicity is wholly to blame for Sports Direct’s travails. This is a company that has never attracted a positive profile in the City and has never seemed too fussed by that. Until recently, Sports Direct’s “pile ’em high and sell ’em cheap” model meant it could afford to ignore the City. That is much harder to do when the market appears to be turning.
Analysts believe Sports Direct is falling behind to rivals, particularly JD Sports, as consumer demand drops because of “poor merchandising” in stores that need upgrading, and a limited selection of third-party brands.
Jonathan Pritchard at Peel Hunt said there were many retailers accused of “all manner of wrong doing” that had not experienced a drop in consumer demand. “Blaming the weather, MPs, the press and the astrological position of Saturn just pang of a business in denial. The problems at Sports Direct lie much deeper than simply a bit of mud thrown.
“The product range is ceasing to appeal to core shoppers and rolling out larger stores to try to impress Nike and Adidas will take a long time. Sports Direct is in the middle of a strategic crisis and making excuses. We expect further disappointing updates.”
The retailer’s recent expansion into Europe through acquisitions of rival businesses has not been smooth either, particularly in Austria where Sports Direct has gained little traction with shoppers. Some fear international expansion means Sports Direct has taken its eye off its core UK market.
However, Ashley told The Times last week that “Austria doesn’t really affect the UK very much. It is like a different country. This is a result of the spiral of all the negative media. You know what affect that has”.
Indeed. One imagines Sports Direct’s shareholders are also acutely aware of the impact of negative media.
However, speculation that Ashley, who is a shrewd operator, is talking down share prices ahead of taking Sports Direct private again, seems wide of the mark. Last week he told me: “Why would I want to take Sports Direct private? Because I personally want more money? I don’t want more money. What I want to do is the right thing for Sports Direct.”
Deirdre Hipwell is the retail and M&A correspondent for The Times
