Analysis: How Mike Ashley is remodelling Sports Direct for the next generation

Having already postponed full-year results from their original date of July 17, a frenzied Friday saw Mike Ashley’s business further push back its prelims from 7am until midday, then 2pm and 4pm.

Eventually they landed just before 5.30pm – an hour after markets had ceased trading for the week and the Sports Direct share price had closed 3.9% down at 229.8p.

When the results were finally unveiled, there were several stings in the tail.

Buried at the very bottom of the most extraordinary of results statements was the revelation that Sports Direct had been landed, late on Thursday night, with a bill of €674m (£606.8m) from the Belgian tax authorities – the primary reason behind Friday’s chaos over timings.

House of Fraser, the department store business Sports Direct paid £90m to rescue from administration last August, was scored just one out of five – or “very bad” – by Ashley, who also called into question whether or not he would have even bought the embattled chain with “the gift of hindsight”. The results revealed that, between August and Sports Direct’s year-end on April 28, House of Fraser made an eye-watering pre-tax loss of £54.6m.

And there was further unwelcome news about the impact of that acquisition on the wider group’s bottom line. Underlying EBITDA fell 6% to £287.8m in the 52-week period. Excluding House of Fraser, it would have climbed 10.9% to £339.4m.

Nevertheless founder and chief executive Ashley insists performance across the group – which also includes Flannels, USC, Evans Cycles and Sofa.com – was “quite good” during the year, despite a 1.6% drop in like-for-likes at the core Sports Direct business. And he is obdurate in his belief that the company has the “strong engine” needed to drive sales, profitability – and further acquisitions – in the future.

But is his bold bid to accelerate Sports Direct’s “elevation” strategy through store refits, better brand relationships and acquisitions careering off course, or has it merely hit a bump in the road?

Mike And The Mechanics

Ashley remains the figurehead for Sports Direct, but make no mistake, to prolong a motoring analogy the tycoon consistently refers back to, this is a business that is now being run by Mike And The Mechanics. Ashley is relying on his head of elevation and son-in-law-to-be Michael Murray, head of strategic investments Liam Rowley and finance boss in waiting Chris Wootton – the “next generation” of Sports Direct leadership – to steer the retailer to success.

Having sat silently for the first 38 minutes of Sports Direct’s results presentation on the sixth floor of its flash new Poland Street offices, Ashley finally springs into action. “SD is not the future of the company. It provides the engine. These guys are putting the beautiful, shiny new car on the outside,” he says, pointing across the table to Rowley on his right and Murray and Wootton sitting to his left.

“The only thing from SD that’s savable is the engine. It’s a very reliable sound engine, but they have to put a whole new body on it, make it fantastic, and make it relevant for the next generation. The next generation of consumer does not want the old SD way of shopping, it’s as simple as that.”

In that respect, Ashley now finds himself going against a number of the principles that made Sports Direct the giant it is today. Stores are being transformed – ‘elevated’, to use the retailer’s lexicon – to become much more upmarket, pleasant places to shop. Branches in Thurrock, Merryhill shopping centre, Northwich and Widnes – showcased in slick videos by Murray during the presentation – offer a stark contrast to the jumble-sale-like stores that made Ashley famous and earned him a fortune.

His strategy to protect himself from the whims and demands of global suppliers such as Nike and Adidas by building a strong stable of own-label clothing brands is also diminishing in prominence.

Although Sports Direct still stocks high volumes of product from own brands such as Everlast, Kangol and Slazenger, Ashley admits that, in ‘elevated’ stores, “increasing space is being given over to third-party brands and they are gradually taking more and more of the turnover”.

The fate of all three core fascias – Sports Direct, House of Fraser and Flannels – is increasingly reliant on support from third-party brands. Yet, by management’s own admission, there is scepticism among such brands around the group’s ‘elevation’ strategy and its plans for a full roll-out across Britain and international markets, such as Portugal and Malaysia. It is a brutally honest assessment, and one that could set alarm bells ringing in the City.

“Product comes when the new store comes. We’re working closely with [the brands] but it’s not fast enough. The level of product access that we are getting doesn’t justify the level of expenditure we are spending on these stores,” Murray, Ashley’s heir apparent, argues.

“Some brands have distribution policies within the sporting goods segment, which we are trying to overcome. Yes, we are a retailer of sporting goods, but we’re climbing more into the athleisure areas as well so we don’t want to just be classified as a sporting goods retailer. Some brands are moving quicker than others in terms of releasing product to us.

“It’s a case of transitioning from the old business model to the new business model as quickly as we can, as cost effectively as we can and building that confidence with brands as quickly as we can.”

Firing up Frasers

Speed is certainly of the essence, and Sports Direct simply may not be able to move fast enough to satisfy the big brands, particularly when it comes to the transformation of House of Fraser.

Murray says 50 new ‘elevated’ stores are planned across the group in the next 12 months, 30 of which will be in the UK. 10 of those will be Flannels locations. Murray says the focus is on “how we merge the Flannels strategy with what our plans are for Frasers”.

Sports Direct is already presenting to luxury powerhouses LVMH and Kering, which between them own brands such as Dior, Givenchy, Gucci, Saint Laurent and Alexander McQueen, in a bid to entice them into Frasers. Management gives little detail around how those conversations are progressing, however.

Either way, it will take much more than the addition of a few luxury labels to rejuvenate House of Fraser’s performance. Ashley admits more of its stores will be shuttered, although he refuses to be drawn on numbers, as he lays bare the extent of its problems.

“Short term, you can’t justify [the acquisition]. We knew that when we bought it. It was like buying a broken down car at the side of the road – it’s broken and we have to get it to the garage and get a new engine in it. That takes a bit of time,” Ashley says, prolonging the motoring analogy.

“Short term, do we regret it? Yes. Medium term, the jury is still out. But long term, we are very hopeful of where we are going. If you think of the success of Flannels and then you think of Frasers, and you think the world is becoming very elevated, very brand-driven, [Frasers] actually should sit in a very nice sweet little spot.

“But it will be a number of years before we sort it out. There are going to be a lot of store closures,” the tycoon admits. “Some of the stores lose money at zero rent. Think about that. What would the point be of fitting those stores? They have to close. So we will have some store closures during the year and we will concentrate from the top down on the refurbs.”

Glasgow will be the first of Ashley’s refitted Frasers stores to launch when it opens its doors this winter. Murray shows off a clutch of exterior CGIs of the site, but Ashley refuses to reveal exactly what shoppers can expect inside the store when pressed for details by Retail Week.

Bandwidth busting?

What’s for certain is that refitting more House of Fraser stores in a similar way will require cash, as well as the time and focus of a deep and experienced management team.

Ashley insists Sports Direct retains a sound balance sheet and the support of banks, but admits the “bandwidth” of his team – further depleted following this month’s departures of retail chief Karen Byers and finance boss Jon Kempster – “has always been an issue”.

Former Sports Direct adviser Norman Pickavance told Retail Week earlier this month that a shortage of numbers at executive level was “the biggest risk to Sports Direct” and its strategy. Despite the potential for his leadership team to be spread too thinly, Ashley is steadfast in refusing to close the door on future acquisitions and focus solely on the retailers he already owns.

“I would think if opportunities come along and we think they are fair, even if we’re struggling with bandwidth, we’d probably be over-brave and still do them. It’s a little bit in our DNA,” Ashley says. “I try and think of analogies, so I think of car accessories and adding too much on. I’m the bloke you can’t see out the window because he’s got the toys and ‘Linda and Mike’ on the screen and the dice – that’s me as a person.

“It’s not him,” Ashley adds, gesturing again towards Murray. “He’s the next generation. He’ll make sure that as long as that elevated SD is being rolled out, then whatever we acquire doesn’t really move the dial that much.”

Retail observers are likely to take that pledge with a pinch of salt, given the impact House of Fraser had on Sports Direct’s turbulent fiscal year.

‘All I Need is a Miracle’ and ‘The Best is Yet to Come’, the real Mike And The Mechanics once sang. Ashley and his own band of retail repairmen have plenty of work to do under the bonnet to ensure it is the latter, rather than the former, that ultimately rings true.