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U.K. CHAIN’S GOAL: DOMINATE GLOBAL SPORTS RETAIL

By Mark Faithfull

Mike Ashley may have been poised to become a billionaire when he faced the press on the eve of his company’s initial public offering on the London Stock Exchange, but he wore no Armani suit or dark glasses. Instead, this retail guru, credited by some of his rivals for single-handedly destroying the U.K. sportswear market, chose to wear a jacket, an open-necked shirt, jeans and scruffy black trainers as he explained why a 43 percent share of his Sports Direct group was worth over $4 billion and told how the company would use the money to become “the world’s largest and most profitable sportswear retailer.”

Over the past 25 years the notoriously publicity-shy Ashley has turned what was once a brand-and-marketing-led industry into a price-driven commodity sector. A vertical model whereby Ashley supplies his 465 stores with his own brands alongside a smattering of Nike and Adidas products has revolutionized the market, giving Sports Direct a huge price advantage. Growing under a variety of fasciae — including West End landmark Lillywhites, Original Shoe and Sports World — the company has become inexorably linked with a dubious U.K. phenomenon: the “Chavs,” as these designer-fashion-minded young Britons from the lower socioeconomic classes are called, many of whom wear Ashley’s clothing as their leisure uniform of choice.

Despite Sports Direct’s $2.28 billion in sales last year, worldwide the company remains the sixth-largest sports retailer, trailing U.S. and world leader Foot Locker ($6.04 billion sales last year) and European market leader Decathlon ($4.93 billion).

Thus, at the end of February Ashley went to market with a $4.18 billion IPO that, aside from enriching him to the tune of nearly $2 billion, could elevate the company’s profile relative to those competitors. “I don’t think you can fulfill the company’s ambition by staying private,” he told analysts before the IPO. “That is the bottom line. In my opinion, the chances of doing that are very, very remote. As a public company we may have a shot at the title if we stay right on top on our game.” Whether the company can actually become the world’s most profitable sports retailer is a big question in the minds of many, he acknowledged. “But we’re going to have a go.”

The first question: What will Sports Direct put the IPO’s proceeds toward? Though some say Sports Direct will swoop on U.K. rival Blacks Leisure (of which it already holds 29 percent and whose acquisition would represent a new, though related, sector), others believe that the company’s eyes are set firmly on the U.S. It is virtually certain that something is going to get snatched up, though. “We will have to make a major acquisition at some stage in the future,” Ashley told the analysts.

That first major acquisition, whether in Europe, the U.S. or Asia, could take place within the next three years, and Ashley says the group is prepared to hit the markets again for additional equity.

But Ashley will also have to address Sports Direct’s low-budget store interiors, because those are unlikely to meet the expectations of customers outside the U.K., says Robert Clark, a senior partner at Retail Knowledge Bank, a U.K.-based research firm. “The business is a real seat-of-the-pants operation, and in-store standards have not been world-leading. It would need to clean up its store environment act,” Clark said.

Further, without the support of Nike and Adidas, Ashley is unlikely to crack the international markets, and the two are known to be unhappy that Sports Direct has undermined in Britain the premium prices they had been charging for their brands. Taking this situation worldwide is unlikely to be at the top of their agenda, to be sure.

In any case, Ashley will have to revisit some of his business practices now that Sports Direct is publicly traded. Anecdotes abound, for instance, about his heavy-handed treatment of suppliers. But Ashley defends the actions, insisting they are simply “part of the game,” as he told the analysts. Sports Direct CEO Dave Forsey is more diplomatic. “We are very keen to have a strong relationship with suppliers,” Forsey said. “Our ambition is to be the world’s most profitable sports retailer, and to do that, we have to have a strong relationship with those third-party suppliers.”

Ashley will also have to address his habit of using the term “closing-down sale” for what is frequently just a store rebranding, says Mark Charnock, an analyst at Investec, an international banking firm. “Sports Direct will have a light on it and won’t be able to sail as close to the wind in terms of trading standards,” Charnock said.

Clark questions whether Sports Direct has the corporate culture necessary to implement worldwide expansion and thrive as a public company. City analysts also raise eyebrows over the fact that Ashley owns some 30 of the freeholds for shops that he leases back to the company on “favorable terms.”

Under the new ownership and management structure, Ashley holds a 57 percent stake in the business and the position of deputy executive chairman. He says he will be in the office “most days.” In the U.K. the company plans to open about 250 more Sports Direct stores and to expand the Original Shoe chain it acquired last year to 250. Analysts say the group can achieve profits of $600 million by 2010 — by which time the company could also have grabbed its first slice of American pie.