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

Thinking of investing in Sports Direct International plc (LON: SPD) shares? Read this first.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »