House of Fraser suppliers have told Drapers they fear for the future of the struggling department store chain and questioned if Sports Direct’s Mike Ashley did his due diligence before he bought it.
In its delayed annual results, Sports Direct Group said it would have thought twice about rescuing HoF last August, after discovering problems at the department store chain that are “nothing short of terminal in nature”.
It said: “If we had the gift of hindsight, we might have made a different decision in August 2018.”
The manager of one menswear brand stocked in House of Fraser said, “The question currently on everybody’s lips is why is Mike Ashley saying now that problems at House of Fraser are nothing short of terminal? He is obviously a very astute businessman, but this makes people question his wisdom because he clearly didn’t perform due diligence before buying HoF.”
The managing director of one womenswear brand stocked in HoF agreed: “Mike Ashley’s hindsight comment concerns us because it shows a 180-degree change of opinion from just a few months ago. If he is only just saying this now, then there must be a real concern regarding the business.
“What also concerns me is the [financial] loss that Sports Direct is announcing [for HoF]. How long will it be until HoF is profitable again?”
Sports Direct Group said it suffered a 6% fall in underlying EBITDA to £287.8m in the 52 weeks to 28 April 2019. Group revenue at Sports Direct was up 10% to £3.7bn in the same period. HoF revenue in the 52 weeks to 28 April was £330.6m, but it made an operating loss of £54.6m.
The group said HoF store closures will follow later this year. It is not currently paying rent on several HoF properties, but they still remain unprofitable, and Ashley said the situation was “unsustainable”. As of 28 April, HoF had 54 stores in the UK, down from 59 when Sports Direct bought the business.
We now expect HoF to start delivering what it has been promising
One HoF supplier said: “I’m not surprised by the closures because it is in such a bad place and we all expected there to be some casualties. Regardless of how much money Ashley’s got, the business is struggling, and he will either need to shut more stores or renegotiate with landlords.”
Ashley pledged to turn HoF into the “Harrods of the high street” when he bought it for £90m last year. He plans to rebrand 31 branches into a premium chain under the Frasers name over the next five years, starting with five in 2020. However, suppliers said the promised transformation could be too little, too late.
“Suppliers and brands are disappointed because Ashley has spoken so often about transforming it into the Harrods of the high street, but there is still no sign of this happening,” said one brand manager. “We now expect HoF to start delivering what it has been promising, but one year has already gone by and we’ve seen little improvement.
“If the brand is in as bad shape as he says it is, then it concerns us as to whether the Frasers concept will ever come into fruition. Either way, he hasn’t been updating brands on the company’s strategy, and so they [could] start to lose faith and cut ties before the plans come into action.”
Sports Direct and HoF have been contacted for comment.
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Sports Direct annual report at a glance
House of Fraser
House of Fraser made an operating loss of £54.6m in the 52 weeks to 28 April, while sales to external customers were valued at £330.6m in the same period. Ashley expressed regret about buying HoF and warns than it’s problems are “nothing short of terminal”. The report also revealed that some of the group’s 54 stores may have to close later this year. Several of the retailer’s locations are currently paying no rent and remain unprofitable, which Ashley called “unsustainable”.
Sports Direct plans to rebrand 31 branches into a premium chain under the Frasers name over the next five years, starting with five in 2020. In the report, Ashley said: “We have acquired a great deal of retail space through the acquisition of House of Fraser and have exchanged contracts on the freehold purchase of the Glasgow Frasers store as a statement of intent regarding our seriousness about the business.”
Belgian tax demand
Sports Direct has been the subject of a tax audit in Belgium and on 25 July, received a payment notice from the Belgian tax authorities in the amount of €674m (including 200% penalties and interest) and requesting further information in relation to, amongst other things, the tax treatment of goods being moved intra-Group throughout the EU via Belgium.
Sports Direct said it felt “most strongly about the Debenhams group failure”. Its concerns were “so grave that, unusually for the Sports Direct Group”, it felt it essential to be as public as possible regarding the events that unfolded between September 2018 and Debenhams entry into administration on 9 April 2019.
UK retail market
The report said “the current bricks and mortar retail market is in dire straits and without substantial support from the government in particular it is in a terminal state”. It added: “To illustrate how serious the situation is on the High Street, alongside the almost weekly administrations, CVAs, frauds, and profit warnings, the British Retail Consortium showed May 2019 as the worst on record.”