(Bloomberg Opinion) -- There was no private jet to inflame investors; no family members becoming involved in the business. But Sports Direct International Plc did drop one nasty into its half-year results: turning House of Fraser into the Harrods of the High Street will be even more painful than anyone expected.
Billionaire Mike Ashley, who founded and leads the sportswear chain, bought House of Fraser in August after it slid into insolvency. His company’s report on Thursday showed that since then, the department store made a loss before interest, tax, depreciation and amortization of 31.5 million pounds ($39.9 million) on revenue of 70.1 million pounds.
This puts Sports Direct in an difficult position. By excluding House of Fraser, it will meet its target of expanding underlying Ebitda between 5 percent and 15 percent by the end of the current fiscal year. Including the department store, it won’t.
As I have argued, there are merits in Ashley’s purchase of House of Fraser. Transforming it into a luxury destination should not only improve sales, but create a halo around Sports Direct as it upgrades its own stores to lure customers from upmarket archrival JD Sports Fashion Plc.
But House of Fraser has suffered from years of underinvestment. That means expensive refits and, as Thursday’s statement demonstrated, an uphill struggle to improve performance.
The challenge is even deeper given the current malaise on the high street. Consumers are pulling in their purse strings in response to the Britain’s political turmoil — on Thursday, Bonmarche Holdings Plc, the discount retailer for more mature customers, blamed Brexit for its severe profit warning. Sports Direct isn’t immune — sales from its U.K. sports retail division were flat in the six months to Oct. 28. It’s imperative that the core of the business stays on track.
Investors weren’t impressed, and they sent the shares down 2 percent.
But with Ashley, even his most puzzling moves usually make sense once the full picture is revealed.
He is currently negotiating with House of Fraser’s landlords, and this bleak picture of the department store chain should help with those talks.
Still, he needs to tread carefully. Shares in his group are down 38 percent since it announced full-year results in July. While Ashley might want to play up the problems at his new business to better terms from landlords and local councils, and perhaps give himself some room to outperform in the future, he also needs to keep investors on side.
Not only does he have to defend the core business against rivals including Amazon.com Inc., he may soon need to make a case for doubling down on Debenhams Plc, in which Sports Direct already has a 28 percent stake. If that chain has a bad Christmas, he might want to pounce.
Putting the two businesses together makes a lot of sense. But if Ashley can’t convince Sports Direct shareholders, they may feel that one struggling department store is quite enough.
To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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