Amidst the announcements of Christmas trading results Mike Ashley's Sports Direct announced that it had sold its 4.6% stake in Debenhams less than a week after acquiring it (netting a profit of £4.5m) in a move that could see them increase it to 6.7% in the future. Confused? You will be!
Despite eschewing most forms of publicity Michael James Wallace "Mike" Ashley is well known for liking a bet (as well as a drink and decorating his house with Christmas lights) and with a potential £64m exposure should it go bust Debenhams would seem to be his latest flutter. Now obviously I don't know what his plans are, but I'd like to share my own vision as to what he could do.
Before I do, back to that arcane derivatives deal. Sports Direct has acknowledged that it is betting with a third party about how far the shares will fall with the said (unknown) third party believing that the shares will fall further. Simon Neville from The Independent reports that "Under the deal Sports Direct is paid a fee for agreeing to buy the shares at a preset - and undisclosed - strike price in the future. If the shares fall below the strike price, it will buy a 6.7% stake in Debenhams at the agreed price, or pay the cash difference between the share and strike price. If the share price continues to rise then the deal is off and Sports Direct pockets the fee from the third party."
Clear? No? Well you're not the only one but it would take a brave person to bet against him as the self styled "Northern club" of David Hughes and Dave Whelan will tell you. It might not be the prettiest retailer to look at, but Sports Direct entered the FTSE 100 in September and is worth more than £4bn. Rather more than be said for Allsports and JJB!
The Telegraph's analysis ran as follows: "Sports Direct may well be the craziest business on the high street. Not only is it run by Mike Ashley, a pantomime villain in Newcastle, but it has publicly fallen out with one of its two biggest suppliers, employs the vast majority of its workers on zero hours contracts and has stores that resemble a jumble sale. And yet, while Sports Direct may be unconventional, it has also been hugely successful. Last year its shares rose 86% and its sales were up more than 20%. This means that now, Sports Direct is also the craziest business in the FTSE 100."
Ashley's strategy, in broad terms, has been to get customers through the doors by selling products from the brands he owns (Donnay, Lonsdale, and Dunlop Slazenger) at a cut price alongside those from Adidas and Nike.
I have read that his team benefits from his passion and enthusiasm. If he can bring this energy to Debenhams then that's the first point in his favour. There is commentary about "sharing brands" between the two businesses but I would assume that Mr Ashley's plans are bigger than this. It should not be forgotten that he has bought Flannels as a foray into the luxury market. USC then Republic, was interested in Debenhams and, I believe, Nicole Farhi.
So, in my imaginary world Mr Ashley would....
Divest the Debenhams chain of some stores and use selected others as "value" stores for his own sports brands and Debenhams own brands.
Set up no more than a dozen Debenhams stores as true upmarket Department stores to rival, and better, House of Fraser. These would house established and new affordable luxury UK and international brands. He also has the cash to support new British designer talent in a way other store groups can't. The problem with achieving all this is him himself. His relationship with suppliers is not great and prestigious brands may be wary of doing business with him.
He would need to invest in store improvements to the tired Debenhams chain, but all is not yet lost at Debenhams. Aside from my ideas above, Mike Ashley can make immediate improvements by using his extremely slick logistics function. Moving stock around and making it available has been a key to his success and this platform could improve customer experience straight away.
Debenhams needs to be "re-energised" and energy is one resource Mike Ashley has in abundance. It seems to me that he needs an expert in managing suppliers to help relationships across all of the brands in which he has a stake. This may be his Achilles heel and if he really wants to succeed in the more upmarket end of retail he needs to change people's perception of him and trust someone else to build this part of his empire.
But even if he just sorts out the Debenhams store estate and gets a new senior team on board, plus use his logistics operation, Debenhams will still benefit hugely from his involvement.
Written by Erica Vilkauls: Director JEM Retail Consultants
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