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Time to short Sports Direct’s share price amid company chaos?

Investors have been fleeing shares in Sports Direct [SPD], as the embattled company is described as “an embarrassment to UK corporate governance” by the City after reporting preliminary results that revealed a dire state of affairs. 

The FTSE 250 stock fell 3.9% to 229.80p on 26 July following a second delayed earnings report for the year which not only showed a relatively flat performance for the 52 weeks to 28 April, but a shocking €674m (£617m) tax bill from Belgium authorities. 

The delay is likely to attract the attention of regulators, as there are only a few reasons under market-abuse rules why a company can legitimately holdback an earnings release. 

Sports Direct’s share price continued its downward spiral over the weekend, falling 6.5% to 214.80p as of Monday’s close. Volume grew 55% during the same period of time to 2,654,711, indicating bearish sentiment. 

Due to the annual results debacle, one shareholder with a £500,000 stake called for the company to devote more resources to corporate governance. Andrew Hollingworth, founder of Holland Advisors, said in an open letter that while senior people in areas such as finance “may come at a level of expense you dislike, they are more than bean counters”.

 


 

CEO immersed in scandal 

Billionaire Mike Ashley founded Sports Direct in 1982 as a result of acquiring Dunlop Slazenger, Karrimor, Kangol and Lonsdale. Valued at £1.15bn, the company is the UK’s largest sportswear retailer, with more than 400 stores. 

He is also the owner of football club Newcastle United, but is most recognised for his retail empire where he owns House of Fraser, Flannels and Evans Cycles, and has stakes in French Connection and the struggling department store chain Debenhams. Sport’s Direct’s exposure to Debenhams recently took an £85m hit. 

However, Ashley has a damaged reputation among investors. From the sale of a 45% stake in Sports Direct that raised £929m for him back in 2007 to the exploitation of workers, and famously losing an expensive gamble over the company’s legal fees, the CEO is laced with controversy. 

The latest of which is the botched £90m acquisition of the ailing House of Fraser, in August 2018. While Ashley had bought the department store to save it from collapse, he recently admitted that problems were “nothing short of terminal”. While he decided not to disclose financial guidance, the company booked an operating loss of £54.6m. 

 

Market cap £1.21bn
PE ratio (TTM) 10.60
EPS (TTM) 21.50
Quarterly Revenue Growth (YoY) 16.10%

Sports Direct share price vitals, Yahoo Finance, 2 August 2019
 

A concerning exodus 

Several high profile members of staff have abruptly left Sports Direct in recent months, including head of retail Karen Byers and company secretary Cameron Olsen. Most recent is the departure of chief financial officer Jon Kempster, who resigned “to pursue other interests” after two years at the company. 

The abandonment also extends to Sports Direct’s suppliers and auditors, as relationships with top brands such as Nike [NKE], Adidas [ADS] and Under Armour [UAA] – which had been key to its elevation strategy to go more upmarket – as well as Grant Thornton, deteriorate. 

Despite Sports Direct being one of Grant Thornton’s largest listed audit clients, and having worked with the retailer since its floatation in 2007, the firm has decided to quit. While the reason for its departure seems primarily due to growing concerns over the disclosure of the retailer’s unexpected tax liability, this isn’t the first time Grant Thornton has had trouble with regulators. 

The Financial Reporting Council, the audit watchdog, has been scrutinising its work for Sports Direct since last year, as investigations are still ongoing over why the firm did not disclose certain payments and how it valued the UK company’s stake in Debenhams before its near collapse. 

Grant Thornton is set to resign after the annual general meeting in September. 

 

Analysts remain undeterred

While there are many doubts surrounding Sports Direct, analysts struck a more optimistic note. Liberum Capital, for instance, kept its “buy” rating on the stock, as it said that fears were “overdone”. 

“The elevation strategy is working, leading to improvement in ranges, Flannels performance is strong, the core business has been robust against a challenging backdrop and the balance sheet remains strong,” the broker said.

“There is a lot of moving parts here and risks in retail are real, but one should not lose sight that Sports Direct generates circa £300m of EBITDA, balance sheet is strong and the market at circa £1.2bn is just too low.” 

“There is a lot of moving parts here and risks in retail are real, but one should not lose sight that Sports Direct generates circa £300m of EBITDA, balance sheet is strong and the market at circa £1.2bn is just too low” - broker at Liberum Capital

 

Indeed, Sports Direct has a healthy PE ratio of 9.99 as of 31 July, alongside a price-to-sales of 0.31 and price-to-books of 0.92, which is strong compared to respective industry averages of 3.37 and 6.58.  

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