Mike Ashley, the high street’s most voracious corporate shopper, underlined his power over British retail last week when he was allowed to peruse the books of a long-coveted target: Debenhams.
As the 54-year-old entrepreneur scrutinised the struggling chain’s finances, he also managed a tilt at two failed retailers over the past fortnight. HMV was ultimately sold to a Canadian entrepreneur and Patisserie Valerie went to a management buyout, despite a blink-and-you’ll-miss-it proposal from Ashley.
Ashley means business: he has hundreds of millions at his fingertips thanks to strong cash generation by his companies and banking arrangements that let him borrow up to £1bn. His Sports Direct group runs 650 stores of its own in the UK, from Sports Direct branches to House of Fraser outlets, and it has interests in a further 500 stores through its shareholdings – which include nearly 30% of Debenhams. Sofa.com and Evans Cycles have also recently been added to the empire. The Sports Direct conglomerate accounts for 3p in every pound spent on non-food purchases in the UK, according to GlobalData.
The reason that Ashley’s name is attached to every high-street deal on the table is because potential sellers know he is one of few investors currently prepared to look at the sector, says one retail industry observer.
“Mike Ashley’s about making money,” says Richard Hyman, an independent consultant. “I don’t think he has got a strategy to take over the high street or save the high street or rescue businesses. He’s a trader and sees that, in periods of great distress, there are opportunities.”
His strategy can seem hard to discern, but Debenhams is certainly taking him seriously as the board tries to keep the store afloat. It has handed over key financial data to Sports Direct in the hope that he will play a part in refinancing its £520m of debt, which must be repaid by next year. Debenhams wants to bring Ashley into the fold after a clash with chair Ian Cheshire led the retail tycoon to oust Cheshire at the annual meeting last month.
Sports Direct UK
The main unit in the Sports Direct group – its UK business - comprises more than 480 stores including Sports Direct, the Lillywhites department store, 38 USC streetwear stores and 30 gyms. Sales were steady at £2.18bn in the latest financial year, as the group closed about 13 sports stores in the UK and seven USC outlets. The company traded well during the World Cup but is suffering amid a general slowdown in high street spending.
Designer brand stores
Sales rose nearly 43%to £162m in the year to 29 April as the group’s Flannels chain, which sells brands including Gucci, Kenzo and Canada Goose, nearly doubled in size and did well online. The designer brand unit has more than 40 stores, including 25 Flannels outlets and eight Cruise stores.
Brands
Sports Direct’s wide range of brands, from Campri skiwear to Karrimor outdoor gear, Slazenger and the Lonsdale boxing brand had a tough time last year, with income from wholesale and licensing falling 23% to £186.3m.
House of Fraser
Sports Direct bought House of Fraser for £90m in August last year after the department store fell into administration. Three stores were closed, leaving 56 open, although at least nine more could close. In its latest financial results, the chain dived to a £43.9m loss on sales of £788m. Some key brands, such as Jigsaw and Jaeger, have pulled out. The company has filled some gaps in stores with sportswear, raising scepticism about Ashley’s aim to turn the chain into the 'Harrods of the High Street'.
Evans Cycles
Evans fell into administration in October amid heavy price competition. Sports Direct bought it for £8m, which was good news for its 1,300 staff. But the company has warned it may have to shut half of Evans’s 62 stores. Just three have closed so far. Evans made a loss of £2.5m last year.
Debenhams – 29.7% stake owned by Sports Direct
The ailing department store which has sales of about £2.9bn is to close up to 50 outlets – almost a third of the chain – and downsize up to 30 site as it battles the rise of online shopping and lacklustre clothing and homewares markets. The company is trying to refinance after issuing three profits warnings last year sending shares down by about 90%.
Ashley is currently mulling his next move, as a six-month block on Sports Direct making a hostile bid for the department store (unless there is a “material change of circumstances”) comes to an end next month. Debenhams is certainly cheap: at just 3.35p, its share price has slumped 90% in a year. But the company has bought itself more time to improve trading by securing a £40m overdraft from its bankers and the backing of a key supplier that will get it through the next six months.
The cash injection came after Debenhams turned down Sports Direct’s offer of a £40m interest-free loan before Christmas because it came with too many strings attached. That offer was a typical play by Ashley, who has used power over a company’s debt to secure ownership in the past, most recently at US retailers Bob’s Stores and Eastern Mountain Sports. He has made no secret of his desire to bring Debenhams closer together with House of Fraser, which he rescued from administration at a cost of £90m in August last year.
Ashley-watchers say he is unlikely to launch a bid for the company, as he probably only wants fewer than 100 of its 165 stores. “He doesn’t pay full price for anything: he’s a promiscuous bargain hunter,” says one industry expert who knows Ashley well. “He wants to push the car over the edge and pick it up and reassemble it.”
It might be asked why Ashley is so keen to snap up an ailing department store when these businesses appear to be suffering more than most from the switch to online shopping. But Ashley himself has explained the opportunities to cut costs if Debenhams pooled its distribution network, purchasing and property management with House of Fraser.
His acquisition of Fraser can also be seen an extension of a long-term strategy of buying up bust brands to gain access to labels that can help expand his empire. The buyout of Flannels in 2012 helped build relationships with designer labels that took him into a world more upmarket than Sports Direct. House of Fraser is the next step.
Unlike financial investors, who base their strategy on property assets, which are difficult to value in a falling market, Ashley is a trader who can see how different brands might fit into his overall portfolio.
The way Ashley has taken on House of Fraser gives an insight into the Sports Direct machine. Since buying it, Ashley has reduced costs by slashing the number of head-office staff and moved the remaining team into Sports Direct’s London head office, where Flannels is also based. The department store’s dated technology has been overhauled using Sports Direct systems and suppliers say he has kept them happy by improving their terms, halving the time it takes them to get paid.
One says: “It’s much easier now, discussions are just quicker. People are still watching how things are happening, but there is not lots of negativity.”
Ashley has also gone into battle with landlords and councils, demanding rent cuts and help to improve the look and feel of stores. At least three House of Fraser stores have closed, but negotiations continue on about 18 sites and new deals have been signed on about 37. The vast majority are now on leases of only a year, giving Ashley time to see if he can build a winning formula for the chain.
If things don’t work out, he can leave without pain. For retailers like House of Fraser, the Ashley way is one of the few viable options left.
