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Questor: Sports Direct is in chaos – we must sell the shares, even at the price of a 28pc loss
Questor share tip: a series of acquisitions has cost the retailer a fortune and proved to be a highly damaging distraction
What a mess. There is so much going on – and going wrong – at Sports Direct that it’s hard to know where to start.
An incomplete list of its problems would include the repeated delays to its annual results, finally published on Friday night, its admission of “terminal” problems at the recently acquired House of Fraser, the announcement, out of the blue, of a tax demand of £605m from the Belgian authorities and the resignation of its finance chief.
Where does this leave our advice to readers to buy the shares in November 2016? That tip painted a picture of a well-run business that could offer the winning, and unusual, combination of competitive prices, high margins and excellent returns on capital.
But businesses do not remain well managed if their bosses are constantly distracted by other things. This, in Questor’s view, is what has happened to Sports Direct.
Its boss, Mike Ashley, has in a short space of time bought a string of businesses, including not just House of Fraser but Game Digital, Sofa.com and Evans Cycles, and engaged in a protracted and ultimately unsuccessful attempt to rescue Debenhams.
The effect has been twofold. First, a lot of money has been wasted: House of Fraser, bought for £90m, now looks like a liability rather than an asset, while tens of millions more were poured into Debenhams shares, now worthless. Second, the core Sports Direct chain has lost its edge.
Analysts at Peel Hunt, the broker, didn’t pull any punches. They called the state of the core business “pretty shocking” and said “management seems to be out of ideas”, adding: “Retail moves at pace; sports retail has been no different. Sports Direct now seems to be strategically snookered.”
After such a series of self-inflicted blows to the company, it’s hard to see the share price recovering quickly, if at all. Although selling now will crystallise a 27.6pc loss, it’s time to admit defeat.
Questor says: sell
Ticker: SPD
Share price at close: 214.4p
Update: Future
It is, fortunately, a very different story at Future, the publisher we tipped in February last year at 382p.
At first sight, with the shares now at £11.46, we have gained 200pc, but we have actually done even better because a subsequent rights issue, used to pay for an acquisition, gave readers the chance to buy more shares at 303p. If they took up those rights, their average buying cost will be reduced and their gain will be 224pc, making Future Questor’s best performer by far.
Does this dramatic rise mean that the shares have got ahead of themselves? Not according to Richard Power, the fund manager who put us on to Future.
- Read Questor’s rules of investment before you follow our tips
Mr Power, who holds the stock in his Octopus UK Micro Cap Growth fund, said the firm’s increasing profitability justified the shares’ rise.
“In April last year brokers were forecasting sales of £92.9m and pre-tax profits of £15.6m for the year to September 2019,” he said. “But the most recent forecast is for sales of £195.9m and profits of £42.9m. Earnings expectations have been upgraded three times this year – in February, May and July.”
He added: “Yes, the shares are up strongly but, goodness me, that is transformational progress in a relatively short period of time.
“This is a management team with ideas, ambition and enthusiasm. They have their foot pressed to the floor. They are doing well at buying businesses and putting their controls in. They are sensible about managing expectations but are looking for more acquisition opportunities.”
He said the recently announced move of Penny Ladkin-Brand from finance director to chief strategy officer was a “message of intent about where the business wants to go”.
Mr Power has had to sell some of his shares because the rise in the price caused Future to account for too large a proportion of his fund. It remains the largest holding in his portfolio, however.
Questor says: hold
Ticker: FUTR
Share price at close: £11.46
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