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Jul 26, 2019
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Sports Direct regrets buying shambolic House of Fraser as it hurts its results

Jul 26, 2019

They've been a long time coming, but Sports Direct finally released its delayed annual results late on Friday. Along the way, the company announced the departure of its interim CFO, which might have been connected to the delay, and a €674m tax bill that the Belgian authorities slapped on it on Thursday, which probably was connected. But the really big news was that the company regrets ever buying House of Fraser.


That's not the kind of admission listed companies make very often, but given that this listed company is run by the famously blunt Mike Ashley, it's perhaps no surprise.

It's been clear for some time that house of Fraser will be no easy fix and having “looked under the bonnet,” Ashley has said it has been suffering from serious under-investment as well as "greed and excess” on the part of those previously in charge there, and his people have found “that the problems are nothing short of terminal in nature.” Strong stuff.

HoF had 59 stores when Sports Direct bought it last year and five of these had closed by the end of the financial year (late April). It seems that many more of them are unprofitable and are likely to close in the year ahead.

Again being very blunt, Ashley added: "On a scale out of 5, with 1 being very bad and 5 being very good, House of Fraser is a 1, albeit we are trying very hard to turn the business around, this will not be quick and it will not be easy.” The word "shambles" was also used.

While also saying he thinks there's a possible bright future for the HoF chain, he said that with hindsight he might not have been so keen to buy it last August.

The company also had a lot to say about brand relationships, which is something that will be crucial for HoF’s turnaround and is also key for the rest of the group, especially Sports Direct. Getting access to the hottest product matters a lot to any company selling trainers, for instance.

On Friday, the group admitted that brand relationships aren't as good as they could be in some parts of the business. “Our brand relationships with certain third-party brands are currently challenging,” its report said. Referencing the elevation strategy that has seen it investing in store upgrades, it said it feels this strategy “is being delivered in line with the requirements initially highlighted to us by these brands several years ago, however we feel there remains some scepticism on their part with regards to our commitment to the full rollout of our elevation strategy. We continue to work on our relationships with these brands and believe a mutually beneficial outcome can be delivered.”

So what else did the results announcement have to say? Well, as mentioned, CFO Jon Kempster is leaving “to pursue other interests”. He’ll be replaced by his deputy Chris Wootton. And there was that Belgian tax bill that the company believes will actually end up being much less than the almost-€700m it stands at currently.


As far as the results themselves were concerned, in the 52 weeks to the end of April, the company saw a 10.2% rise in group revenue to £3.7bn, but excluding acquisitions and on a currency-neutral basis, revenue was down 1.9%. Within this, UK sports retail rose 0.3% to £2.187bn. Premium lifestyle, which includes the designer label retailer Flannels, surged 26.3% to £204.8m, due to an increased store portfolio and online sales. And European sports retail fell 5.9% to £599.8m. Rest-of-world retail was up 12.2% to £215.9m. House of Fraser saw revenue of £330.6m.

Underlying EBITDA fell 6% to £287.8m and underlying pre-tax profit rose only 5% to £143.3m, while underlying profit after tax fell 9% to £91.5m. House of Fraser’s operating loss was £54.6m, worse than analysts had predicted.

That's a lot of numbers to take in, but looking at the business, it’s clear that times are tough, even though it’s holding its own in many areas. The company said “the current bricks and mortar retail market is in dire straits and without substantial support from the Government in particular it is in a terminal state. The Sports Direct Group is not immune to this and indeed if not for the Elevation Strategy we implemented in recent years we would be looking at significant problems in the future.”


The company did say that Flannels is doing well. “In contrast to House of Fraser, on a scale of 1 to 5 we would rank Flannels as a 4, being good,” it explained. "We think we can push this up to a 5 in the near future with further support from the luxury brands, for the benefit of all stakeholders. As part of the Elevation Strategy led by Michael Murray, Flannels stores and website continue to go from strength to strength. As part of the Premium Lifestyle division they have grown from sales of £60.4m in FY17 to £173.9 in FY19. Our latest stores, including in Newcastle, highlight our premium offering which is bringing much needed investment and success into the UK High Street.”

So was there anything else to say in the results announcement? Just one point. On its French Connection stake, the company said: “We continue to have an arms-length supplier/retailer relationship with French Connection, and we consider this relationship to be strong and working well. We do not participate in management decisions. We note that French Connection has been reviewing strategic options, including a possible sale, since October last year. We believe this process has gone on far too long, and urge management to reach a favourable conclusion for all shareholders as soon as possible.”

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