The Long Bad Friday – Sports Direct’s shambolic annual results revealed
Sole traders working 60 plus hour weeks while assuming several roles within their company might look at CEOs like Mike Ashley of Sports Direct and envy their status. They’ll think they don’t have to bother with the day-to-day demands of running a company and can take a strategic overview of the group as a whole and enjoy the fruits of having shops in every town in the country and owning a Premier League football club.
Like the older parent, Ashley would shake his head privately and tell them to be careful what they wished for as they didn’t know the half of it.
Sports Direct observers now know more than half after an extraordinary 72 hours even by the standards of this idiosyncratic company, its culture and its owner.
The yearly accounts for the Sports Direct group were finally published after being delayed multiple times since their original due date of 18 July. Auditors Grant Thornton have been taking particular care with the accounts after being criticised for their perceived lax role in writing off the accounts of Patisserie Valerie which later collapsed into administration. The Financial Reporting Council described their work as unacceptable.
Due to this very public rebuke, they’ve taken special care to produce a robust and accurate set of results which has contributed to the delay as they’ve had differences of opinion with the company on the method used to account for stock along with complex accounting issues regarding the 2018 House of Fraser takeover.
The last thing the auditor would expect or welcome would be a multi-million pound tax demand appearing the day before the accounts were announced, yet that’s what happened.
The Belgian government has issued a payment notice for €674m (£605m) for the tax treatment of goods being moved intra-group throughout the EU via Belgium.
The staggering amount, equal to several years of annual profits, includes both 200% penalties and interest. The group says it will enter into a mediation process with the tax authorities and say that it is “less than probable” that it would ultimately have to pay but it threw a hand grenade into an already volatile atmosphere all the same.
As we go to press Grant Thornton have informed the FRC that they will formally step away from their role with Sports Direct after the Annual General Meeting in September.
House of Failure
Given the surprise and size of the tax demand, the other main headline from the figures is in danger of being overlooked – a rare statement of contrition and regret from the group’s owner about his decision to acquire House of Fraser.
He described the stores as having “terminal problems” with more store closures likely as a result which will create great uncertainty about the future profitability of the entire Sports Direct group.
Dealing with the backdrop of tough trading conditions that every high street retailer is facing, House of Fraser has been losing £1m a week in the year up to the end of April. The stores posted a £54.6m operating loss and in a further revelation, Ashley said that some of the group’s 54 remaining stores were paying zero rent and were still unprofitable.
As a statement from a CEO it’s incredible: “On a scale out of 5, with 1 being very bad and 5 being very good, House of Fraser is a 1. If we had the gift of hindsight we might have made a different decision in August 2018.”
Overall Sports Direct group profits were up 5% to £142.3m for the year to April but this was still a historically low figure. Along with the main sports stores, USC, Flannels, Cruise and Goals Soccer Centres, in the past 18 months alone the group also acquired Evans Cycles, Sofa.com and most recently Game Digital.
The groups 29.9% stake in Debenhams worth approx. £150m was wiped out when the chain went into administration earlier this year with Sports Direct only recently abandoning their legal challenge to the pre-pack administration.
Investors reacted with predictable dismay following the chaotic weekend with share value crashing by as much as 27% once trading opened this morning although they were to recover to a more modest 9% loss.
So unprecedented has the news around the accounts being that two other stories that would have generated headlines on their own have gone under the radar. Firstly, Ashley made the incredible claim that the Chief Executives and Finance Directors of listed companies should have voluntary drug tests to avoid blackmail attempts.
The other key news was that Finance Director Jon Kempster would be stepping down in September, another key departure from the senior team following head of retail services Karen Byers who had been with the organisation 28 years.
Mo money, mo problems
Reading this, you may be shaking your head in bemusement, wondering how such as a successful organisation can get itself in such a mess but regardless of size, problems left unsolved have a nasty habit of metastasizing throughout the business, sometimes terminally.
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