Mike Ashley’s Sports Direct has been labelled “an embarrassment to UK corporate governance” after a chaotic announcement of its annual results last week, including multiple delays and the shock revelation of a £605m tax bill.
Investors and analysts pointed to poor performance at Sports Direct’s core chain, a string of ill-advised acquisitions, the exit of several senior executives and a £5.35m pay award to Michael Murray, Ashley’s daughter’s partner who acts as a property consultant to the group, as evidence of a company with poor governance controls.
“This company is an embarrassment to UK corporate governance,” said corporate governance specialist Pirc in a statement. “Years of ineffective chairing seem to have taken their toll, and the company veers from one mistake to the next.”
Pirc said independent shareholders had to “use everything they’ve got to push for better governance” as “this farcical behaviour has gone on for far too long”. It called for a independent investors to beat the 37% vote against Ashley’s reinstatement, which last year prompted a tirade by the Sports Direct founder against shareholders who he said had “stabbed Sports Direct and myself in the back”.
Shares in the retail group dived by more than a quarter on Monday morning as the market responded to a rambling statement put out after the market closed on Friday which included a warning that its House of Fraser chain had “terminal” problems. The stock recovered to 214.8p at the end of the day reducing the loss to 6.5%.
Annual results published more than 10 hours late on Friday revealed that Sports Direct was struggling amid tough trading conditions on the high street.
The delay was caused by a last-minute €674m (£551m) initial bill from the Belgian authorities, relating to VAT charges on goods moved within the EU. Sports Direct only has 35 stores in Belgium but has two warehouses in the country.
Logistics experts said the VAT bill could relate to either to the movement of goods between there and the retailer’s main distribution centre in Shirebrook, Derbyshire, or online sales.
The company reassured investors the bill was unlikely to result in the full amount falling due. But some analysts said a £54.6m operating loss at House of Fraser, which Sports Direct bought for £90m nearly a year ago, only compounded difficulties at the group’s established UK sports stores, where sales fell 1.6% . The company admitted its relationship with brands was “currently challenging”, despite efforts to improve the look of its Sports Direct stores.
“The home truths about the core Sports Direct business were pretty shocking and management seems to be out of ideas,” said analysts at brokerage Peel Hunt. “Whilst Sports Direct may have done all the likes of Nike and Adidas asked them to do in the flagship stores, the premium product that maybe it was expecting as a consequence has not emerged. And it doesn’t sound like that is about to change.”
“Sports Direct now seems to be strategically snookered, checkmated and clean bowled. The shares are hard to value, but are surely only for the very brave.”
David Cumming, the chief investment officer for equities and head of UK equities at Aviva Investors, told the BBC on Monday: “Sports Direct is almost a case study in failed corporate governance.” He said Ashley “has obviously got retail talent – or had retail talent”, but the firm had “lost its way”.
In the annual results, Ashley said the state of House of Fraser, which his company bought out of administration last year, had created “significant uncertainty” as to the future profitability of the entire group. He warned of further store closures at House of Fraser and said he regretted the acquisition.