Sports Direct International (LSE: SPD) has certainly been in the news of late, but for all the wrong reasons, as Mike Ashley’s firm has been accused of imposing Victorian working conditions on its employees.
The latest blow for investors comes from an 11% share price crunch today, to 311p, ahead of the company’s AGM in which many are expecting a shareholder revolt and a demand for chairman Keith Hellawell to be removed — although the board declined Mr Hellawell’s offer to resign over the weekend.
After MPs described working practices at the firm’s Shirebrook warehouse in Derbyshire as more akin to a Victorian workhouse than a modern retailer, the firm’s own legal advisers, Reynolds Porter Chamberlain, were surprisingly critical. Their report has led to a plan to put a workers’ representative on the board and to abolish zero-hours contracts (not that the latter will make much difference, as most of the Shirebrook workers are agency staff and unaffected).
Mr Ashley has promised improvements, saying “I want to be the pioneer who gets it done” — although I doubt many would quite see dragging a firm’s working practices up to late 20th century standards as ‘pioneering’. But what does all this mean for investors?
Profit warning
In a trading update today, Sports Direct has warned that it expects EBITDA for the year to April 2017 to come in around around £300m, a 21% fall from 2016’s £381m, and that’s put further pressure on the already beleaguered shares. Since a peak in August 2015, Sports Direct shares have shed more than half their value, as they’ve fallen badly out of favour with growth investors.
Some of that was probably inevitable, with the shares selling on P/E multiples in the mid-20s in 2014. That was possibly justified if growth of around 20% per year could be sustained in the long term, but growth at that level almost always comes to an end before too long, especially in something as low-tech as the retail sector.
What do we need to see now, in the weeks and months after the AGM?
Perhaps what would serve shareholders best would be for Mike Ashley to adopt a more hands-off approach to the running of the company. He might well have been the man needed to turn a single shop into the international retail group it is today, but a whole different set of skills is called for in a company that’s aspiring to regain its place in the FTSE 100.
Should you buy?
So what should we do about Sports Direct shares in the short term? Today the focus is on the negative aspects of the firm — criticism of its working practices, difficulties with international expansion, a growing shareholder revolt and an increasing desire to see someone new at the top.
In short, we’re surely close to the point of maximum pessimism — and isn’t that the best time to buy?
With a 22% fall in EPS forecast for this year, followed by a modest rebound of 4% tentatively on the cards for April 2018, we’re looking at P/E multiples of 11.6 and 11.2 respectively.
I expect we’ll see more short-term turmoil, but in five years time I can see Sports Direct shares nicely ahead of today’s level.
