Sports Direct regrets House of Fraser buy, could face huge Belgian tax bill

By James Davey

LONDON (Reuters) - Sports Direct founder Mike Ashley said buying House of Fraser may have been a mistake for the British sporting goods retailer, in a delayed results statement that also warned it could face a 674 million euro (£606 million) bill from Belgium's tax authority.

Problems integrating the House of Fraser department store business, which Sports Direct purchased out of administration for 90 million pounds last August, dragged down the group's annual core earnings by 6%.

It said on Friday it was not giving guidance for its new 2019-20 year because House of Fraser had led to significant uncertainty as to the future profitability of the entire group. It warned investors to be wary of analysts' forecasts.

Adding to its troubles, the very last paragraph of Sports Direct's 44-page results statement also revealed it had received on Thursday a 674 million euro ($750.03 million) "payment notice" from the Belgian tax authorities.

It said the body had requested information in relation to, amongst other things, the tax treatment of goods being moved intra-group throughout the European Union via Belgium.

Sports Direct said it will enter mediation to respond to the authority's questions and provide it with documents.

"Management believe... that it is less than probable that material VAT and penalties will be due in Belgium as result of the tax audit," it said.

Sports Direct made underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of 287.8 million pounds in the year to April 28. Revenue increased 10.2% to 3.7 billion pounds.

But excluding House of Fraser, underlying EBITDA rose 10.9% to 339.4 million pounds - within the guidance Sports Direct issued in December of a 5% to 15% improvement.

Ashley warned turning around House of Fraser "will not be quick and it will not be easy".

"On a scale out of 5, with 1 being very bad and 5 being very good, House of Fraser is a 1."

"If we had the gift of hindsight we might have made a different decision in August 2018," he added.

Ashley also slammed the management of Debenhams, another department store group he tried and failed to buy before it fell into administration in April, wiping out Sports Direct's near 30% equity stake.

Some 62% of Sports Direct's equity is owned by Ashley, its founder and chief executive, who also owns Premier League soccer club Newcastle United. Its shares have fallen 44% over the last year.

DELAY AFTER DELAY

Sports Direct's results were originally due on July 18, but the company and its auditor Grant Thornton needed more time to prepare the accounts. They were re-scheduled for 0600 GMT on Friday but, after further delays, not released until 1620 GMT.

"This is no way to run a public company," said independent retail analyst Nick Bubb.

The group said finance chief Jon Kempster would step down in September after two years and be succeeded by Chris Wootton, currently deputy CFO.

Sports Direct said media reports of an audit tender process were inaccurate and said it would seek the approval of shareholders to reappoint Grant Thornton for a further year.

The results delay was the latest in a long list of missteps by Sports Direct and Ashley that have severely tested the firm's relationship with investors. They have been critical of its corporate governance and employment practices.

Last year Ashley said he had been "stabbed in the back" by investors who had failed to support his board.

Since Sports Direct floated in 2007, there has been periodic speculation that Ashley might take the firm private.

However, analysts say he wants to retain Sports Direct's listed status because he believes it gives the firm gravitas in its negotiations with key suppliers - Nike, Adidas, Puma and Under Armour.

The group's core chain has been a relatively resilient performer in recent years, compared with a string of British retailers that have either gone out of business or closed stores in the face of subdued consumer spending and a shift to shopping online.

However, the group's engagement in a raft of dealmaking has complicated the business and stretched its management.

(Reporting by James Davey; additional reporting by Paul Sandle, Editing by Edmund Blair, Mark Potter, David Evans and Jan Harvey)