Thursday, 20 July 2017

The city loves a success story - is Sports Direct it?

The city loves to see a company on a seemingly never-ending upward trajectory. The business that just keeps on growing forever and provides strong dividends to boot is always seen by pension funds and investors s something that they will back time after time. The city loves a success story and there is often one there to fawn over. Over the last few years there have been a flurry of retailers that have seemed to fit this bracket -
  • Tesco
  • Next
  • Primark
  • Sports Direct
And the last one is a really interesting company from start to finish. Today Sports Direct have announced their profits have halved. In most of the instances of the 'darling of the city' there is a time when the magic wears off-

Tesco have been through some accounting scandals.
Primark have been embroiled in rows over poorly paid workers.
Sports Direct's practices have come under a lot of scrutiny.

Fixing these problems can often be costly and the downturn in profits because of this cost can turn investors off. The company states that a lot of the lost profits were down to the weaker pound but we also know that they have had to work on the way they treat people. A statement said -

Chairman Keith Hellawell said the company had made "positive progress" across the business as it continued to "strive to ensure that all of our people are treated with dignity and respect".

We know that a rise in profits and share price has come about because Sports Direct don't have as much of a staffing cost as some of their rivals due to poor practices and the reliance on zero hours contracts. This is changing as we speak.

How does a retailer grow at this pace?

Any retailer can go from servicing clients in one store to expanding rapidly. It may not be the dream of all in retail but for some this is the ideal. There are two main ways to grow this quickly -

  1. To buy out others and expand your reach this way
  2. To grow organically, often fuelled by great marketing or finding a niche
Retailers can suddenly find a success story on their hands. Sports Direct became very big very quickly by some buyouts and finding a niche in the marketplace. Consumers obviously wanted access to sportswear and equipment on the High Street at a low price. There isn't really a direct competitor for what Sports Direct do. Those under the age of 25 will always wear sports gear and this is the Sports Direct core market. The layout of the shops and the lack of customer service don't bother people in this category as much, because they much lower prices in exchange.

The city loves a success story - is this one going sour?

It really is difficult to say at this stage. At the time of writing, their share price has jumped significantly on the back of the comments that supported this news, if not the news itself. A fall in profits is never viewed as positive by the city. If Sports Direct can clean up its image as well as provide strong profits and dividends for investors then there is no reason to suggest that this happy relationship with the city will stop. The big corporate investors don't generally have a problem with practices that are not 100% squeaky clean as long as they are generally legal and the company makes money. Mike Ashley has worked this philosophy to its fullest over the last few years but has crossed the line a few too many times.

The future of Sports Direct will depend on its ability to keep customers happy with their process, I suspect. There is very little else for customers to look on their time in a Sports Direct store on with fondness.

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