Sports Direct falls as tax bill deepens governance worries

Sports Direct International Plc plunged after the U.K. retailer reported a surprise tax bill of almost $750 million, the departure of its financial chief and deepening woes at department-store chain House of Fraser.

The litany of problems, including a fall in full-year profit, rekindled investors’ concerns about corporate governance. The shares fell as much as 28 percent early Monday in London, the most since their 2007 listing, paring losses to 6.5 percent at the close.

The report from billionaire Mike Ashley’s flagship company came Friday after markets closed in London, more than 10 hours after it was expected. It had already been postponed nearly two weeks to allow more time to compile the information. Chief Financial Officer Jon Kempster will step down, the company said, to be replaced by Deputy CFO Chris Wootton.

A Sports Direct International Plc store in London
A pedestrian looks inside a Sports Direct International Plc store in London, U.K. Photographer: Chris Ratcliffe/Bloomberg

Sports Direct said it received a payment notice for 674 million euros ($749 million) after an audit of its taxes in Belgium. The claim relates largely to goods transported through that country, the company said in a follow-up statement Monday after the close of trading.

Sports Direct said it’s “not probable” it will be liable for the amounts cited, and “accordingly believes that there is no requirement for a material provision or accrual to be made.”

Consumer woes

Retailers across the U.K. are closing stores and scaling back as merchants have been hit by the shift to online shopping and consumer uncertainty over Brexit. Investors have been concerned that Ashley, the retailer’s colorful founder and chief executive officer, has been too occupied with trying to buy chains like Debenhams, which he’s now battling in court, after he snapped up House of Fraser last year.

“Buying House of Fraser was like buying a broken-down car at the end of the road,” Ashley said at a press conference Friday. “In the short term, I regret it. In the medium term, the jury’s still out, and in the long term, I’d like to think we’re hopeful.” The company plans to close a number of House of Fraser stores this year, he said.

Sports Direct’s underlying earnings before interest, taxes, depreciation and amortization fell 6 percent to 288 million pounds ($320 million), the company said. House of Fraser had a loss of 52 million pounds for the year. Without that impact, group earnings would have grown, the company said.

House of Fraser

“It is alarming that management look to have regrets over acquiring House of Fraser, and it raises questions as to why its ‘terminal’ issues weren’t flagged in the due diligence process — something that highlights the risks around Sports Direct’s ‘scattergun’ acquisition strategy,” Berenberg analyst Graham Renwick said in a note to clients.

The retailer didn’t pay a dividend during the year and said it won’t declare a final payout either. Sports Direct said it will buy back 30 million pounds worth of shares through Sept. 10.

If new acquisition openings arise, Ashley said the company would consider them, despite recent troubles. “If opportunities come along, even without bandwidth, we’ll probably be over-brave and still do them,” he said. “It’s in our DNA.”

— With assistance from Lisa Pham