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House of Fraser weighs heavily on Sports Direct

Ahead of Sports Direct’s delayed results, expected on Friday, Drapers analyses Mike Ashley’s progress in transforming House of Fraser into the “Harrods of the high street” and integrating it into the group alongside premium fascia Flannels.

When Sports Direct acquired House of Fraser from administrator EY for £90m in August 2018 the department store chain was on its knees. 

Sports Direct boss Mike Ashley promised to transform the retailer into the “Harrods of the high street” and retain as many of its 59 stores – and jobs – as he could.

Although Sports Direct has bought several retailers in the past 12 months, including Evans Cycles and Game Digital, HoF is by far its biggest acquisition and the transition has proved challenging.

Last week Sports Direct delayed the reporting of its annual results citing “complexities” of integrating HoF and “uncertainty as to the future trading performance” of the business, together with the “increased regulatory scrutiny of auditors and audits”.

The [Sports Direct] results will now come a matter of weeks before the licences to trade the House of Fraser stores expire

Richard Hyman, retail analyst

One source suggested the delay could simply relate to accountancy red tape: “Grant Thornton [the accountant for Sports Direct] took a rap on the knuckles for their reporting in the last few years. The late results could simply be them ensuring that they’ve got everything completely correct, and have analysed the data [as they] don’t want to mislead the market.”

house of fraser rushden

Hosue of Fraser, Rushden Lakes, Northamptonshire

However, the head of UK at one menswear brand stocked by HoF said trade had been poor: “The stores are quiet. Even going into Oxford Street is quiet. The consumer doesn’t have much confidence [in HoF] at the moment and public perception of the brand has changed.”

While Sports Direct bought the freehold of some HoF stores, including Frasers in Glasgow, the future of many others is still uncertain. Negotiations with landlords are ongoing.

Sports Direct declined to comment on how many House of Fraser stores are still open and how many are currently earmarked for closure. 

Analyst Richard Hyman expects some of the agreements Sports Direct initially signed with landlords for House of Fraser to lapse, as they were designed to keep many stores open for a year following the acquisition: “The [Sports Direct] results will now come a matter of weeks before the licences to trade the stores expire. How many will be renewed? Not many I suspect.”

Upmarket shift

In May HoF revealed it is planning to change 31 stores into a premium chain under the Frasers name over the next five years, starting with five in 2020.

The new stores will be modelled on luxury department store chain Flannels, which is also owned by Sports Direct. The Frasers stores will open on the sites of existing HoF units and on some new sites, including one in Liverpool that is under development. The group is preparing to invest millions in the chain, in return for a three-year rent-free period.

 

Screenshot 2019 07 23 at 09.56.50

Read the Drapers Interview with Sports Direct Group’s head of elevation, Mike Murray, and Flannels’ head of brand, Carl Tallents: Flannels: ‘We want to be the biggest global luxury retailer’

 

Although the proposals could diversify and elevate HoF’s offer, some believe the strategy to revamp the group “from the top down” is having a detrimental impact on other areas of the business.

“They have invested a lot in places such as the Glasgow store, and are looking at the luxury market, but overall it’s not a pretty picture,” said the menswear brand head. “At the moment [the former House of Fraser fascia] Dickins & Jones in Richmond [south-west London], looks like a Sports Direct: it has Adidas boxes all over it.

“I don’t understand the Frasers idea at all. It’s competing with Flannels and why would you do that?”

Hyman is also unsure if the decision will pay off: “It represents an enormous gamble. Ashley likes a flutter but this would be much more than that. I think history suggests there is often a gap between what Ashley encourages people to think, and what he actually does. HoF today does not look like a viable department store.”

Has [Ashley] launched the ‘Harrods of the High Street’? No not yet, but everyone has to start somewhere

House of Fraser menswear supplier

HoF’s concessions business model has proved to be a learning curve for Ashley and Sports Direct, as its other fascias operate differently.

“[Sports Direct] bought a business in HoF that was predicated on concession relationships and they don’t know this model as they are more used to wholesale relationships,” said one retailer who has concessions in the department store. “This led to many misalignments, and the lack of a knowledgeable relationship partner with whom to connect made it difficult.”

House of Fraser, King William Street, in the City of London

Source: James Stringer

House of Fraser at King William Street in the City of London was on the closure list

A HoF menswear supplier agreed that Sports Direct’s acquisition of HoF had been a challenge for the wider business: “[Ashley] knows about sportswear and occasionwear, but to be fair he knows nothing about womenswear or formal menswear, which is a lot of what HoF is.

“Saying that, as a business they have worked positively from our perspective, and if you look at it, none of the key brands have actually left.

“Has [Ashley] launched the ‘Harrods of the high street’? No, not yet, but everyone has to start somewhere. He may well turn Sports Direct into a higher-end offering, but this will take time.”

Ashley himself has spent a lot of time with us, and our experience with [head of buying] Sean Nevitt has been very good

Commercial manger of a brand stocked by House of Fraser 

The commercial manager of another brand stocked in HoF was positive about the working relationship: “We lost a lot of money due to [HoF’s] administration, but we can’t blame Sports Direct for that. We had to realise that they are a different company. A lot of brands were not happy with the administration but in reality, if you look at HoF in a ‘glass half-full’ way, [Sports Direct] are the saviours of the business, and thankfully stores are still open.

“The issue is there have been a lot of changes very quickly, and that had to happen but amalgamating warehouses takes time. [Sports Direct] have tried to keep deliveries flowing, but system integration takes time, and we are waiting to see more visibility on sales and other matters.

“The team under Ashley, though, has been good and worked quickly to see where we are going. Ashley himself has spent a lot of time with us, and our experience with [head of buying] Sean Nevitt has been very good. We can only praise that.”

Teething problems

However, despite the efforts to integrate HoF as smoothly as possible problems remain, particularly in online functions.

In the weeks following the administration and buyout, the HoF website was effectively mothballed for weeks on end as Sports Direct battled XPO Logistics over money owed to the distributor before the administration.

Brands reported an “alarming” drop-off in sales, and expressed concerns about the integration of the HoF website on to the Sports Direct platform.

House of fraser

“The major problem for Sports Direct is the HoF website,” said one brand source. “Speak to any brand it is a problem. Previously a lot of brands were optimised into searches, which has been changed and sales have dropped off quite substantially as they have had to go onto a new platform which has created integration problems. Searches do not work as they should, and all this has had an impact on traffic.”

Another key issue for Sports Direct is convincing the City that it has a long-term vision for the wider business.

“Sports Direct is investing in the high street when everyone else is running from it,” said David Fox, co-head of retail at Colliers International. “If you take Sports Direct at face value, then you have to assume they are putting faith in the portfolio and what they are doing in the marketplace. The flipside of that is trying to understand what their long-term strategy is.”

One property agent added: “It’s no secret that [Ashley] is not well liked in the City, but importantly he does have control over all arms of the business. Any decisions that are made rest with him and he is very much in control of his own destiny – at least for the moment.” 

Sports Direct declined to comment. 

The Drapers Verdict

In the midst of a difficult trading environment Sports Direct faces a challenging time ahead with House of Fraser. Plans to elevate the retailer into the “Harrods of the high street” have yet to materialise and sales at the department store have taken a hit.

Although suppliers, in the main, remain supportive, investment is needed in all stores and problems with online SEO need to be addressed. The question is will Sports Direct shareholders give Ashley and his team time to turn HoF around, or will the clamour for returns on investment impede his grand designs?

 

 

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