Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Mike Ashley has been window shopping.

Sports Direct, the British billionaire's discount retailer, has been linked with bids for both BHS and Austin Reed, two U.K. store chains that collapsed into administration last month. While saving the thousands of jobs at risk would be welcome, the outcome may be less desirable for Sports Direct shareholders.

Ashley's company blamed a profit warning last July on failing to make enough acquisitions to compensate for sluggish sales of its tracksuits and trainers. In particular, it missed out on House of Fraser, bought by China's Sanpower.

Since then, profit expectations have fallen further. The consensus analyst forecast of full-year Ebitda is 375 million pounds ($542m) in the year to April 30 2016, according to Bloomberg data. That compares with 480 million pounds a year ago.

Losing Game
Sports Direct profit forecasts have fallen over the past year as trading has weakened
Source: Bloomberg Data
May 2016 is Bloomberg consensus

This explains why the thirst for deals is not sated -- even though it's hard to be persuaded by the quality of the mooted targets.

Of the two, BHS makes a bit more sense. It has some large, desirable city center locations. Sports Direct has shown that when it puts its mind (and money) to it, it can produce decent-looking stores that appeal to the big brands it wants to woo. Its flagship on London's Oxford Street, for example, is less down-at-heel than many of its shops.

Ashley has also dabbled with bringing his discount shopping nous to the old-fashioned department store: think of a kind of cheap and cheerful John Lewis. Part of the BHS estate might also be suitable for this.

The problem is, BHS has 164 stores. Not all of them will suit Ashley's purposes. And BHS is loss-making, to the tune of 70 million pounds in the year to August 30 2014, the last available accounts. So Sports Direct would need to cut costs aggressively to boost Ebitda.

The logic for buying Austin Reed looks flimsier still. It's cheap -- a price tag of 30 million pounds has been suggested. But synergies with Sports Direct look limited. True, Ashley has developed a more upmarket fashion division. But Austin Reed's suits are in a different segment of the market to designer dresses and de luxe sportswear.

Sports Direct certainly has the balance sheet to support deals. Net debt was just 20.3 million pounds on October 25th. But a strategy of chasing acquisitions to deliver growth rarely ends well. What's more, Sports Direct's M&A cred has been sullied by a purchase in Austria. It announced a 32 million pound impairment for the business at the half year.

Falling Behind
Sports Direct has lost its fwd p/e premium to JD Sports and trades at a discount
Source: Bloomberg Intelligence
Based on forward 12 months earnings

Sports Direct shares have fallen more than 40 percent over the past year, significantly worse than the FTSE All Share. The traditional premium to old adversary JD Sports has disappeared. Ashley would do better trying to match his rival's underlying trading performance, rather than rushing out to buy any ill-fitting goods.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net