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Sports Direct shares: why I’d avoid them at all costs

Back in late 2016, I was cautiously optimistic about the outlook for Sports Direct (LSE: SPD) shares. They looked cheap, and with Mike Ashley planning to turn the retail giant into the ‘Selfridges of sports retail’ I thought there was a chance the shares could outperform.

However, fast forward to today, and my thoughts on the stock are very different. It’s become apparent that this is a company with some serious issues, and as such, the shares now have very little investment appeal, in my view. Here’s a look at a few of the company’s problems. 

Flawed business model

Let’s start with the business model. If you’ve ever been into a Sports Direct store, you’ll know that there’s a strong focus on cheaper brands such as Karrimor, Dunlop, and Slazenger. If you’re looking for a top-of-the-range pair of running shoes from the likes of Nike, Adidas, or Asics, you’re going to struggle. Personally, I think this focus on cheaper brands is backfiring in a massive way.

The demand for premium sporting goods and apparel has never been greater. Just look at the share prices of Nike and Adidas – both stocks are up nearly 50% in the last two years alone. Similarly, look at JD Sports Fashion, which focuses heavily on these brands. Its shares up are nearly 80% in two years. Yet Sports Direct’s share price has fallen around 45% over the same period.

Something is clearly wrong and we can’t blame the UK high street here as Sports Direct has a strong online presence. For a company whose mission statement is “To become Europe’s leading ELEVATED Sporting Goods Retailer”, it has a long way to go.

Toxic corporate governance

The next main problem with Sports Direct is its corporate governance (the way the company is controlled). In short, it stinks. Not only did the company delay its final results on 18 July (a huge red flag) but the group then failed to publish its results on time last Friday morning and didn’t end up publishing them until 5.19pm – nearly an hour after the market closed.

Naturally, investors were unimpressed with this development, with Neil Wilson, market analyst at Markets.com, saying “it’s a total and utter shambles”, and David Cumming, head of UK equities at Aviva Investors stating that “Sports Direct is almost a case study in failed corporate governance.”

This kind of activity, combined with the fact there’s no dividend, demonstrates that there’s literally zero regard for shareholders.

Plenty more issues

There are plenty of other concerning issues too. For example, the full-year results themselves were not good. For the year, underlying basic earnings per share fell 8% and for FY2020, the company abandoned all guidance. In addition, the group announced that it has been hit with a £605m tax bill from Belgian Authorities and that CFO Jon Kempster has resigned.

Then, there are Mike Ashley’s random spending sprees. The investment in Debenhams backfired and in relation to House of Fraser, Sports Direct has said: “The problems are nothing short of terminal in nature.”

Finally, there appear to be conflicts between the company and auditors, with Ashley stating: “Our early discussions with the Big Four have thrown up some barriers.”

These are all red flags. Putting everything together, the company is a basket case, in my view. I’d avoid the stock at all costs.

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Edward Sheldon owns shares in JD Sports Fashion. The Motley Fool UK owns shares of and has recommended Nike. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.