Reports of Sports Direct's demise are greatly exaggerated

Its reputation may be battered, but Mike Ashley's brash retailer isn't going anywhere.

Last Updated: 08 Dec 2016

It’s been a tough year. No, I don’t mean Brexit or Trump. Spare a thought instead for poor old Sports Direct, a retailer whose reputation has been as roundly battered this year as a well-worn Everlast headguard.

(It didn’t take part in MT’s Britain’s Most Admired Companies 2016 – one wonders where it would have placed.)

Billionaire founder and CEO Mike Ashley blames the media for ‘unfair’ commentary. Whether it’s unfair is up for debate, but it’s undoubtedly negative.

Look at Sports Direct’s most recent results, for the half year to October 26. The newspaper headlines understandably focused on the firm’s plunging profits – reported pre-tax profits down 25.1%, underlying EBITDA down 33% or, even juicier, underlying pre-tax profits down 57%.

That’s all fair enough – these are big numbers – but it paints an unrealistically gloomy picture of a scandal-ridden retailer in steep decline.

In most newspaper articles, you’ll find Sports Direct’s financials juxtaposed with references to ‘workhouse conditions’, secret recordings of MPs or zero-hour contracts. That implies cause and effect: Sports Direct’s reputation is suffering and, oh look, now its profits are down. The problem is that this story just doesn’t add up.

Don’t you just love accounts?

If customers had indeed abandoned Sports Direct in disgust after reading about Shirebrook strip searches in the Guardian, then the firm’s underlying revenues (ignoring currency shifts and acquisitions) wouldn’t have risen 4%.  

That’s not to say the stories haven’t hurt the company – slowing demand is likely why Ashley stopped opening new stores for instance – but it’s not the main reason it’s currently in the red.

Profits are down because costs went up after Brexit – Sports Direct buys abroad and sells in the UK, so the falling pound has hit it hard, especially because it was ‘unhedged’ before September.

To assess the full financial impact of Sports Direct’s recent scandals will take time. Other than currency costs, the biggest effects on its underlying business will be seen in its ability to attract and motivate employees, and possibly in its relationships with suppliers. (Brands are like fickle American high schoolers – reluctant to hang out with pariahs.)

Somehow though it seems unlikely this will have a profound impact on the long-term profitability of the business. It’s not as though Sports Direct is unused to thriving with a less than sparkling reputation, after all.

Nonetheless, those hopeful for change can take comfort in Ashley’s efforts to reform the business: inviting MPs to visit (okay that one didn’t work out so well...), reviewing zero-hour contracts, bringing workers onto the board, getting rid of the warehouse’s infamous ‘six strikes’ policy and working with investors to appoint an independent chair for a corporate governance review.

These may not turn Sports Direct into a paragon of corporate virtue and they certainly won’t fix its reputation among the wider public - Ashley has been cast as a pantomime villain of British business, which means it’s next to impossible for him to get good press.

But ultimately he doesn’t need good press or indeed a spotless reputation. Ashley needs the share price to go back up, and that means keeping investors happy that the scandals will stop and the profits will flow. The way things are going, at least one of them looks likely. 


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