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Sports Direct warns of 'terminal' House of Fraser problems and €674m tax bill Sports Direct warns of 'terminal' House of Fraser problems and €674m tax bill
(about 2 hours later)
Mike Ashley’s Sports Direct expressed regret at buying a “terminal” House of Fraser and could not predict profits for the year ahead as it revealed it had been landed this week with a surprise €674m tax bill from the Belgian authorities. Mike Ashley’s Sports Direct has warned that its House of Fraser chain has “terminal” problems as the company revealed it had been hit with a bombshell €674m (£605m) tax bill from the Belgian authorities.
The retail group said its finance director John Kempster would be stepping down in September, the third senior departure in recent weeks, after a shambolic day in which it postponed publication of its already delayed annual results several times. In an extraordinary statement issued 10 hours late – and after the stock exchange had closed – the maverick businessman laid bare the state of his retail empire.
In a lengthy and often ranting statement, Sports Direct said it feared House of Fraser problems were “nothing short of terminal in nature” as it reported an operating loss of £54.6m, worse than analysts had expected, at the ailing department store chain. The billionaire chief executive, who also owns Newcastle United, said that the desperate state of the House of Fraser chain, which the group bought out of administration in 2018, had created “significant uncertainty” as to the future profitability of the entire group. Its main Sports Direct chain was also struggling against a backdrop of tough trading conditions, with weak underlying sales.
The FTSE listed company’s results were originally due to be released on 18 July, only to be postponed as Sports Direct wrestled with a string of factors it said had made the results more complicated and might also force it to change its financial forecasts. In the 38-page document, which at various points descended into Ashley’s personal rants about the failings of “self-interested” City advisers, the company said:
It blamed the complexities of its House of Fraser takeover, recent volatile trading conditions and tighter regulatory scrutiny of its auditor, Grant Thornton, due to its role in the Patisserie Valerie collapse. It had received a €674m tax bill from the Belgian authorities that relates to products that had been routed internally via Belgium.
Sports Direct also made the shock announcement that Belgian tax authorities had issued the company with a hefty tax bill, including interest, on Thursday. The retailer said it hoped to respond to requests for information from Belgium and it was “less than probable that material VAT and penalties” would be due. House of Fraser’s financial problems could be “terminal” with more store closures likely
It round off an entirely bizarre day for the company. On Wednesday the company promised to release its results at 7am on Friday. However, the results did not materialise and the City received no communication about the delay until less than an hour before a planned 9.30am meeting for investors and press at Sports Direct’s London head office. In a frank admission, Ashley indicated that he regretted the House of Fraser deal: “if we had the gift of hindsight we might have made a different decision in August 2018.”
At that point the company admitted it was “still finalising” the figures and expected them to be published by noon. “Apologies for any inconvenience,” it said in an email. Its finance director John Kempster is stepping down in September, the third senior departure in recent weeks
When midday came, Sports Direct released a statement saying it was “currently still finalising our preliminary results”, and would provide a further update at 2pm. But at about 2.20pm, it said there would be a further delay until 4pm. The results were finally published after 5pm, when markets had already closed. The chief executives and finance directors of listed companies should have voluntary drug tests so as to avoid blackmail.
The UK Listing Authority, the stock market regulator, is understood to be alert to the series of delays. While there may be concerns about communication with the investors, Sports Direct has until the end of August to release its annual results under stock market rules. It had received a €674m tax bill from the Belgian authorities that relates to products that had been routed internally via Belgium.
Shares in the company fell by nearly 4% to 234pas Neil Wilson, an analyst at Markets.com, described the latest delay as a “total and utter shambles”. House of Fraser’s financial problems could be “terminal” with more store closures likely
“Above all [the latest delay] betrays a total disregard for shareholders. It not only raises questions about the haphazard way in which the investor relations and finance teams are run, but also could suggest a material problem with the numbers,” he said. “Additionally, it raises a question about whether Ashley will ultimately take the company private.” In a frank admission, Ashley indicated that he regretted the House of Fraser deal: “if we had the gift of hindsight we might have made a different decision in August 2018.”
Analysts at Berenberg suggested the biggest risk indicated by the delay was that Grant Thornton had failed to complete – or were possibly refusing to sign off – the accounts. Its finance director John Kempster is stepping down in September, the third senior departure in recent weeks
Shareholder advisory group Pirc called on Sports Direct to provide shareholders with “an explanation of what has happened”. It added that Grant Thornton should consider providing its own separate statement on the matter. The chief executives and finance directors of listed companies should have voluntary drug tests so as to avoid blackmail.
On 24 July, when Sports Direct announced it would be publishing its results on Friday, the company said its audit was at an advanced stage but not yet complete. Some analysts fear that the colourful deal-maker has taken on too much in the last 18 months, after a buying spree that has seen the £3.7bn group acquire Evans Cycles, the furniture business Sofa.com, and Game Digital, as well as House of Fraser.
Shares in the retail group, controlled by the Newcastle United owner Mike Ashley, fell nearly 10% last week to 238p, their lowest level this year, as analysts suggested the company was struggling to cope with a string of acquisitions made in the past 18 months. The company’s results were originally due to be released on 18 July, but publication was postponed when Sports Direct admitted that the complexities of its House of Fraser takeover and tighter regulatory scrutiny of its auditor, Grant Thornton, due to its role in the Patisserie Valerie collapse, were making the financial results more complicated to prepare.
Some analysts fear Ashley and his team have taken on too much, having bought Evans Cycles, the furniture business Sofa.com, Game Digital and House of Fraser. Throughout Friday, Sports Direct set several new deadlines for the publication of its results – a routine process that for listed companies happens at 7am – only for them to miss them until after the market had closed. Neil Wilson, an analyst at share trading platform Markets.com, described the delays as a “total and utter shambles”.
It also became involved in a bitter, and ultimately unsuccessful, battle for control of Debenhams. Ashley is also embroiled in a bust-up with Goals Soccer Centre, the five-a-side pitch operator whose shares dived after the company admitted it had underpaid VAT. Wilson said the delays showed a total disregard for shareholders: “It not only raises questions about the haphazard way in which the investor relations and finance teams are run … it raises a question about whether Ashley will ultimately take the company private.”
As it struggles to finalise a plan for the ailing House of Fraser, Sports Direct has also been struck by the departure of several key executives including Ashley’s long-term lieutenant Karen Byers. The hefty tax bill was the biggest upset in the figures as it is the equivalent of several years of annual profits. The tax shock came as the group said it could not put a figure on its future profitability because of the disastrous buyout of the House of Fraser chain, which lost £1m a week in the year to the end of April. Profits for the overall group were up 5% at £142.3m for the year to April, but that was at the bottom end of expectations.
Sports Direct said in December that underlying profits would rise by 5-15%, taking them to between about £321m and £352m. But it admitted profits would fall once the effect of House of Fraser was included. Analysts expected House of Fraser to lose about £50m for the year. A number of key brands have exited the chain while Ashley has filled gaps on the shop floor with discounted Sports Direct brands such as Lonsdale. Even before the tax demand came to light, the chaotic day had hit the company’s share price, which closed down nearly 4% at 234p. The company told a half-empty meeting of analysts late on Friday night that the demand had come in at “the 11th hour”. It said it would respond to the requests for information and appeared optimistic that it could fight off the bill.
In the results Sports Direct said underlying profits rose 5% to £142.3m in the year to the end of April, the bottom end of expectations. In a stark warning that will worry House of Fraser staff, who have already endured a year of uncertainty following the takeover last August, Ashley said the retailer was struggling to make some stores work even when it was paying landlords no rent at all. So far, just five stores have closed, leaving 54 still trading, but Ashley said it had discovered problems that were “nothing short of terminal in nature”.
“On a scale out of 5, with 1 being very bad and 5 being very good, House of Fraser is a 1,” Ashley said, in characteristically blunt language. “There are still a number of stores which are currently paying zero rent and that are still unprofitable, and unfortunately this is not sustainable.”
The billionaire is a controversial figure in the City. He famously resorted to a game of spoof to settle a £200,000 legal bill and a court case revealed the billionaire’s penchant for extreme drinking competitions, one of which ended with him vomiting into a fireplace.
In a bizarre aside, Ashley made a case for City regulators to ask senior management to take voluntary drug tests, his rationale being that personal issues could lead to blackmail and senior managers making decisions based on “saving their own skin”.
He also lashed out at regulators who he said did not have sufficient teeth to prevent self-interested City professionals like lawyers and accountants taking actions that were “absolutely not in the best interests of their clients and other relevant stakeholders” so that they could earn big fees.
Shares in the retail group, in which Ashley is the biggest shareholder, with a stake of almost 62%, have fallen in value by more than 40% in the past year, as analysts became increasingly concerned that the company was struggling to integrate the new business.
Ashley’s behaviour had also been erratic as he fought a bitter and ultimately unsuccessful battle for control of Debenhams. The businessman is also embroiled in a bust-up with Goals Soccer Centre, the five-a-side pitch operator whose shares dived after the company admitted that it had underpaid VAT.
As Ashley struggles to turn around House of Fraser, Sports Direct has also been struck by the departure of several key executives, including Ashley’s long-term lieutenant, Karen Byers. The departure of finance director John Kempster was also unexpected.
Sports Direct InternationalSports Direct International
Corporate governanceCorporate governance
Retail industryRetail industry
House of FraserHouse of Fraser
Mike AshleyMike Ashley
Annual resultsAnnual results
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