Sports Direct shares surge despite profit plunge

Sports Direct branded a 'cautionary tale' after falling out of FTSE 100

02 March

Sports Direct's fall from grace and inevitable ejection from the FTSE 100 index of largest companies has prompted a wave of pronouncements on the importance of strong corporate governance and business ethics.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

Frances O'Grady, the general secretary of the TUC, told The Guardian: "This should be a cautionary tale for companies who treat their workers badly."

Chuka Umunna, the former shadow business secretary who triggered a parliamentary debate on the retailer in December, said: "What this illustrates is that good business is good business and vice versa.

"Investors and customers are not only looking for good value; increasingly they are looking for good values in a company."

Ashley Hamilton Claxton, the corporate governance manager at Sports Direct shareholder Royal London Asset Management, said: "Over the long term, shareholder value is intrinsically linked to corporate governance and companies ignore this at their peril."

The discount sportswear retailer has seen its share price slump around 50 per cent since hitting a peak last summer. The Guardian notes the stock has fallen 40 per cent since December alone, when the paper published a searing expose on its working practices.

As at Tuesday evening, the final price used for the regular quarterly review of FTSE 100 constituents, Sports Direct was only the 142nd most valuable company.

Arguably the most influential factor in the share slide was the company lowering its full-year profit guidance by £40m in January, four weeks after it had restated an already downgraded estimate. It blamed poor high street trading conditions - but then suffered the ignominy of watching its main rival, JD Sports, post a bumper ten per cent boost to profits.

Among the many failings reported at Sports Direct were "gulag" conditions for warehouse staff, who were said to be subjected to routine and extensive searches, banned from wearing 800 or more sports brands and, The Guardian alleged, in many cases effectively paid less than the national minimum wage.

In response, Sports Direct announced a pay increase for staff and an internal investigation to be led by founder and deputy chairman Mike Ashley which will report in the next few weeks.

But it is the ongoing central importance of Ashley, the majority shareholder in the company, to Sport Direct's decision-making that has riled many shareholders and led to calls for a new chairman to be appointed to keep him in check.

"Crispin Odey, a City hedge fund manager and Sports Direct shareholder who once called Ashley a 'genius', publicly revised his view in December, describing him as 'difficult to house train'," says The Guardian. He also characterised Ashley's "authority over the retailer's other directors as 'dangerous'".

Sports Direct discord grows as FTSE 100 ejection looms

29 January

Disagreement is growing between Sports Direct's investors and its management as its share price slump continues.

Stock has fallen from a peak above 800p per share last August to a little below 402p today, wiping around £2.3bn off of the retailer's market value. The plunge has coincided with "an increasing focus on the company's business practices – including criticisms of its working conditions and its use of zero-hour contracts", notes the Daily Mail [1].

In fact, the paper adds, the company has fallen so far that is it "almost certain" to be knocked out of the FTSE 100 index of the largest listed companies in the UK when the list is re-assessed on Wednesday.

One particularly high profile piece of negative publicity in December followed an undercover investigation by The Guardian, which alleged staff were effectively being paid less than the national minimum wage. Amid criticism from politicians, the company announced an internal investigation to be led by 55 per cent majority owner and deputy chairman Mike Ashley.

But it is the role of Ashley that is most in the line of fire for angry institutional investors. "Mike Ashley acts like the chief executive. He thinks the company is his own plaything and does not want to play the game as a public company," one top 20 shareholder told the Financial Times.

The paper adds that investors are unhappy with the direction of the company under chairman Keith Hellawell, a former policeman with no previous retail experience. Sports Direct has been criticised for strategic decisions such as eschewing labels in favour of own-brand clothing, untidy stores and prioritising a discount offer over the shopping experience.

"It has become clear that the chairman lacks the skill to drive Sports Direct forward. Mike Ashley needs a strong chairman to challenge him," said one top ten investor.

Another large UK institutional investor, who no longer holds Sports Direct shares, said: "I sold out because I felt the company had gone as far as it could. I think Mike was good when the company was smaller, but now he is in trouble.

"I can't see where the next leg of growth is coming from. Sports Direct is like Newcastle United Football Club [which Ashley owns]. The group got into the top league, but then struggled."

Sports Direct shown up by JD Sports' sales surge

15 January

A week after under-fire Sports Direct issued a profit warning in the wake of dire Christmas sales, its main rival has revealed polar opposite results for the critical trading period.

JD Sports said like-for-like sales at stores open more than one year had risen 10.6 per cent during the five weeks to 2 January. This, it added, should help it to exceed by at least 10 per cent the consensus forecast from city analysts for pre-tax profits of £136m for the year to the end of January.

The results will be embarrassing for Sports Direct, which revised its annual profit target lower for the second time since last summer after weak Christmas trading. Four weeks after confirming a forecast of £420m, it said it now expected sales as low as £380m as the warm winter weather and weak high street footfall had undermined performance in December.

Some observers questioned whether a sports retailer that is less reliant on seasonal clothing ranges would really suffer to such a severe extent from warm weather. JD Sports's strong results will only strengthen claims that any issues are more fundamental in nature.

There has been criticism of Sports Direct's tolerance of untidy stores and, particularly, its concentration on own-brand products. Conversely, JD Sports has "nurtured close links with Adidas and Nike… that have made it popular with younger customers" and "stocks brands such as Giorgio Armani’s EA7 range, which rivals do not".

JD Sports shares rose 8 per cent yesterday, to a record high of 1,140p. This afternoon, they were sitting on a gain of close to 3 per cent for the session to 1,134p. Sports Direct dropped 2.4 per cent to 411.7p, meaning it remains about 50 per cent down compared to a peak last summer.

Sports Direct had seen shares rise earlier this week after announcing the purchase of minority stakes in US sports retailers Iconix Brand Group Inc and Dick's Sporting Goods Inc, which it hopes will open up opportunities to "develop commercial partnerships". Reuters notes the company's minority stake-buying in Britain has helped it open concessions in Tesco and Debenhams.

Sports Direct slide continues after broker warnings

12 January

Sports Direct's fall from grace continued yesterday, as its shares widened losses for 2016 so far to 30 per cent.

The discount sportswear retailer fell 7 per cent, which the Daily Mail notes made it the second-worst faller on the FTSE-100 for the day. This followed Friday's 15 per cent slump in the wake of a surprise profit warning that full-year profits would be up to £40m less than forecast just four weeks ago. At 403p, the shares closed at around half their peak of last summer.

Sports Direct itself is blaming the revision on poor December trading, which it said was the result of unseasonably warm weather and weak high street footfall. But given that the company does not rely on seasonal ranges in the same way as other clothing shops and that high street sales are widely regarded to have been broadly flat, analysts reckon there are more fundamental issues.

There have been complaints over the preponderance of own-brand products, poor shop upkeep and, notably, reputational damage inflicted by reports of poor working conditions, including claims that warehouse staff were not being paid the minimum wage. Sports Direct has denied the charges and is undertaking an investigation.

Analysts at Liberum, Cantor Fitzgerald and Numis all downgraded the stock to "hold" on Monday, as target prices were lowered to between 450p and 480p. It has recorded a little bit of ground in a rising market on Tuesday, up 2.1 per cent to 411.5p this morning.

Cantor Fitzgerald analysts told The Guardian: "In view of the lack of transparency on strategy and in view that the company is likely to be eliminated from the FTSE-100 over the next quarter, we are now taking a more cautious view on valuation."

Does Sports Direct share crash show scandals are taking a toll?

8 January

Sports Direct shares have fallen hard in afternoon trading, bucking a wider rise on the FTSE-100 by plummeting as much as 15 per cent.

The freefall came after the company issued a profit warning and said full-year earnings would come in at around £380m, undershooting previous guidance by as much as £40m. This came as a shock to the City as management had confirmed the forecast as recently as 10 December, following a downgrade from £480m in the summer.

As with other clothing firms such as Next and Marks and Spencer, Sports Direct says sales of its winter ranges were hit by mild temperatures during what was the warmest December on record. Coupled with a general "deterioration of trading conditions on the high street", this had undermined performance in the past four weeks, it said - and will continue to so until April.

However, the size of the drop perhaps indicates that shareholders are not convinced the company is merely suffering from a temporary blip hitting the wider retail sector. It relies on sales of sportswear and trainers that can rise in a mild winter, as is apparently the case with some of its main rivals.

JD Sports upgraded its own profit expectations by £10m in early December, The Guardian notes, while Mountain Warehouse said it had seen a near 29 per cent rise in sales over the six weeks to 3 January.

In between the two Sports Direct trading updates, there was the small matter of the Guardian publishing the findings of an undercover probe that alleged, among other things, that the company is flouting minimum-wage laws and forcing workers to endure "gulag" working conditions.

Sports Direct has always strongly denied the claims and said founder Mike Ashley is directly leading an internal probe into the reports.

Independent retail analyst Nick Bubb and Jonathan Pritchard at Peel Hunt both cited the negative publicity and said this could be prompting shoppers with a conscience to vote with their wallets. They also highlighted long-held concerns over the preponderance of own-brand products and consumer wariness over discounting claims.

What is clear is that Sports Direct needs to make some major improvements to win back the favour of City investors - its shares are now down more than 40 per cent since August.

Has Sports Direct done enough to answer critics?

18 December

Sports Direct has sought to draw a line under recent criticism of its employment practices, issuing an extraordinary point-by-point rebuttal of allegations that employees work in 'gulag' conditions and announcing a formal review of agency staff terms and conditions.

The review will be overseen by the founder, deputy chairman and majority shareholder Mike Ashley and will begin in the New Year, The Guardian notes.

The company has been at the centre of a storm since an expose in the newspaper last week, based on the experiences of two undercover reporters who worked at Sports Direct's warehouse in Shirebrook, Derbyshire in November. It alleged that staff are "harangued" by tannoy announcements and are so fearful of losing work – 80 per cent were said to be on zero-hours contracts that mean work is offered at the management's discretion – that they do not take time off even if their children are unwell.

Critically, the report also claimed workers are routinely paid less than the legal minimum wage as a result of being forced to give up their own time being searched for stolen goods and draconian lateness penalties.

Workers at the factory are employed by the agency Transline, but Sports Direct is held accountable for the working practices described. It said in a statement that the review will "ensure the company does not just meet its legal obligations, but also provides a good environment for the entire workforce".

The sportswear retailer has always maintained it meets its obligations under the national minimum wage, but it has also now hit back at the wider allegations.

The Daily Telegraph says that Sports Direct has denied that any workers at the factory are on zero-hours contracts, conceding that some staff in its shops are. It says that many prefer the flexibility, move on to permanent jobs in time and that most benefit from generous bonuses.

The company has rejected claims that its tannoy is used to 'harangue' staff, defended its policy of banning workers from wearing certain sportswear as the simplest mechanism to prevent theft of brands manufactured on site, and said searches were another necessary measure to which senior staff are also subjected.

Has the rebuttal and review answered critics? Labour backbencher and former shadow business secretary Chuka Umunna is not impressed, arguing that an in-house review has "the whiff of a pupil marking its own homework" and that it should be undertaken by an "independent third party". Labour has called for a formal investigation by HMRC.

Investors appeared a little more appeased, trading the stock up 0.4 per cent to 578p. Sports Direct's shares are still down by around 13 per cent since the day the expose was published, coinciding with a weak set of results, and down by around 29 per cent from a high of 815p earlier this summer.

Sports Direct customers key to improving ethics

16 December

Pressure is mounting on Sports Direct and its founder Mike Ashley from politicians – but it is its customers that may ultimately hold the key to improving ethics.

The Guardian, which last week broke the story that Sports Direct could effectively be paying swaths of warehouse staff less than the minimum wage, reports that Meg Hillier, the Labour MP who chairs the commons Public Accounts Committee, is the latest figure to call for a formal HMRC inquiry into the allegations.

"These staff in these low-wage jobs, in a company that sounds as though it is ruled by fear, will be afraid to come forward – and they shouldn't have to do that in their own right," she said. "So I do hope that HMRC are already in there."

Hillier was responding to the suggestion, since rebuffed by business minister Nick Boles and HMRC itself, that the agency can only investigate if a complaint is raised directly by a staff member. Since the Guardian has also alleged draconian oversight from managers that means staff are afraid to even take time off ill, this is seen as unlikely.

For its part, Sports Direct has offered little comment on the broader allegations but has said it "believes it's in compliance with minimum wage regulations and takes its responsibilities extremely seriously".

Writing in City AM, Stephen Shakespeare, co-founder of polling organisation YouGov and chair of the data strategy board at the Department for Business Innovation and Skills, says the biggest pressure on the company could come from its customers.

Fund managers have been speaking out against the company's governance in the wake of weak results and around £600m has been wiped off Sports Direct's stock market value in recent days. Shakespeare says new polls show its reputation score among consumers has hit the lowest for eight months, at minus 17 per cent.

One fund manager, Crispin Odey, has argued that it is falling sales, rather than laudable opprobrium, that will bring about lasting change in the way companies such as Sports Direct and others like it operate.

"Shoppers need to understand that these [low] prices are only possible because every cost has been analysed and reduced as far as it will go."