UK sportswear retailer Sports Direct says it might have made a “different decision” regarding its acquisition of House of Fraser last year, had it had the gift of hindsight.

The revelation came in the retailer’s delayed annual earnings release after close of business on Friday (26 July).

The Mike Ashley-owned retailer acquired House of Fraser in a GBP90m (US$115m) deal announced just hours after the chain went into administration in August of last year.  The rescue weighed heavily on the group’s first-half profits.

In its full-year results announcement, Sports Direct says it invested close to GBP90m to kick start House of Fraser’s supply chain following the acquisition and signed up to the GBP95m purchase of the flagship Glasgow Frasers store.

However, it notes “as we have continued to look under the bonnet as we integrate the business, we have found that the problems are nothing short of terminal in nature.”

The retailer lists “serious underinvestment in stores and appropriate support services, excessive and unsustainable outsourcing and financing, and selling brands to their Chinese parent shortly before administration” as some of the problems faced.

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It adds: “On a scale out of five, with one being very bad and five being very good, House of Fraser is a one, albeit we are trying very hard to turn the business around this will not be quick and it will not be easy. Even though we do believe there could be a bright future for House of Fraser, and indeed have publicised our Frasers vision which we are very excited about, if we had the gift of hindsight we might have made a different decision in August 2018.”

The comments come as Sports Direct reported a 6% decline in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to GBP287.8m. Excluding House of Fraser, underlying EBITDA grew 10.9% to GBP339.4m.

Group revenue increased by 10.2% to GBP3.1bn, however, excluding acquisitions and on a currency-neutral basis, revenue decreased by 1.9%.

Meanwhile, the retailer also announced it has received a payment notice from the Belgian tax authorities to the tune of EUR674m (including 200% penalties and interest) and requesting further information in relation to, amongst other things, the tax treatment of goods being moved intra-group throughout the EU via Belgium.  

Adding to Ashley’s woes, is the news in a separate announcement, Sports Direct’s CFO Jon Kempster has decided not to stand for re-election at the next AGM and will, therefore, step down from his role.

Kempster is handing over to Chris Wootton who will be promoted from deputy CFO effective 12 September.

In the wake of the retailer’s earnings release, James Yacoub, retail analyst at GlobalData, notes Ashley is clearly too focused on his quest to become the king of the high street by snapping up multiple retailers, and has lost sight of optimising Sports Direct’s existing operations and achieving organic growth, with the increase in overall revenue largely driven by newly acquired businesses.

“Lacklustre financial results are down to an absence of strategic direction – Sports Direct’s attempt to rescue the dilapidated department store retailer House of Fraser continues be an arduous task with further store closures and internal restructuring on the horizon, and in a bluntly worded release Ashley admitted regret at having bought it. Its aggressive acquisition strategy has stretched management too thin with several key executives absconding the business –  retail chief Karen Byres once dubbed by Mike Ashley as the “glue that holds it all together” recently departed from the business after 28 years of service, indicating that the retailer is in a sticky situation.”

Looking ahead, Yacoub says Ashley must now look to recuperate the business by pulling it out of crisis by focusing on organically growing its existing businesses and finding a way to integrate House of Fraser into its commercial model.

“Corporate governance is clearly an underlying issue within the business and Ashley must use this opportunity to reshuffle the board by hiring experienced executives who can help steer the ship in the right direction. This will be a costly but essential process to ensure that the retailer can avoid spectacles such as the one demonstrated on Friday.”