Photographer: Chris Ratcliffe

Sports Direct Drops as Stagnant Sales Raise Strategy Doubts

  • Shares fall as much as 15%, steepest drop since 2011
  • Competitor JD Sports increased profit guidance last week

Sports Direct International Plc shares fell the most in more than four years after sales growth stagnated, raising concern that the retailer’s own brands are losing out to exclusive labels from Nike Inc. and Adidas AG.

Retail sales at the U.K.’s biggest sporting-goods merchant rose 0.2 percent to 1.2 billion pounds ($1.8 billion) in the six months ended Oct. 25, the company said Thursday. The shares slumped as much as 15 percent to 567 pence, the steepest drop since August 2011.

Sports Direct is placing greater emphasis on brands that it owns, such as Kangol and Lonsdale, rather than the type of exclusive Nike and Adidas ranges that are proving so popular with customers of competitor JD Sports Fashion Plc. Sales at JD Sports are surging, prompting the company to increase profit guidance last week.

“Sports Direct customers overall are unimpressed by the increasing amounts of own-label product,” Jonathan Pritchard, an analyst at Peel Hunt, said by e-mail. “We are concerned about the cracks emerging in the business model.”

Sports Direct Chief Executive Officer Dave Forsey said the exclusive branded products that are boosting JD’s sales performance aren’t available at his stores.

Higher Margins

At least the focus on own-label product is benefiting profitability. Sports Direct’s retail gross margin widened by 1.1 percentage point to 45.6 percent. About half of the company’s store sales come from its own brands.

Chairman Keith Hellawell said the results should be viewed against the backdrop of “disappointing" summer weather and a hangover from last year’s soccer World Cup. His comments bore similarities to those of a year ago, when the company cited the early elimination of the England soccer team from the tournament and unseasonably mild fall weather as drags on performance.

Separately, Forsey addressed recent press scrutiny of Sports Direct’s treatment of warehouse staff -- which includes mandatory searches at the end of shifts and financial penalties for lateness. The Guardian newspaper sent undercover reporters to work at a Sports Direct warehouse in central England last month and reported that delays in leaving work meant workers effectively received less than the minimum wage.

“We simply don’t recognize how we are being portrayed,” Forsey said in an interview. “We will make even more effort than we have done to ensure we deal with the negative PR coverage.”

The concern raised over staff treatment will add to long-standing investor unease about corporate governance at Sports Direct, which is majority-owned by billionaire Mike Ashley.

“Until the company improves both its governance and its relationships with employees, shareholders face substantial risks," Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management, said by e-mail.

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