So the white knight for House of Fraser has turned out to be Mike Ashley and Sports Direct. The saga has been complicated and HoF briefly went into administration before the Sports Direct bid was made. At first sight he is not the obvious candidate to restore the fortunes of House of Fraser, but now the dust is settling, it’s worth taking a step back and thinking about his chances of success.

The timing of the deal is a little odd. If the deal had been struck a couple of days earlier, the transition might have been smoother. As it is, there was a payments dispute with XPO Logistics which operates the distribution centre and XPO refused to deliver goods. HoF had to refund all current orders and at the time of writing the website automatically transfers to the Flannels website. Perhaps Mike Ashley was just holding out for a lower price.

Poles apart

Mike Ashley has come in for much criticism of the working practices at Sports Direct, even from a Parliamentary committee. But he has one outstanding qualification to take on HoF – he is an excellent retailer, one of the most successful store based retailers of the 2000s. He is not just a dealer making a profit for himself. He has built an exceptionally successful business, and if he has made a personal fortune it has been through the success of the business he has built and that success has come because people want to shop at his stores.

The doubts arise because HoF and Sports Direct are at opposite poles of the retail spectrum. Is it really possible that a man who has led a business dedicated to selling low priced, mostly branded, sportswear at the lower end of the market should be able to turn around the most upmarket of the mass market department stores in the country?

The top end

But there is more to the Sports Direct group than the Sports Direct stores. The business is dominated by the Sports Direct chain, but 5% of sales come from what the company calls its “Premium Lifestyle” division. There are three brands in this division – Flannels (21 stores), Cruise (10) and Van Mildert (3). It looks as if Cruise and Van Mildert are being converted to the Flannels fascia. The websites already look similar.

Flannels is a premium end, branded fashion business with ranges extending to the luxury end of the market.

Until last year this division also included USC, a branded clothing business targeting the young middle mass market. For management purposes it is now included with the Sports Direct chain. USC seems to be being run down, the outlet numbers have certainly been falling.

Does that say something about Mike Ashley’s management style. Is he really able to run a premium business without resorting to the price led, discount policies of Sports Direct?

What is he buying?

Before being bought by SanPower, HoF was performing well. That was why it seemed so attractive. But the downturn was swift. It is not clear from the outside quite what went wrong. There were certainly too many changes in top management, with the most recent appointment having no retail experience at all. We also have our doubts about the own brand strategy as the company had been removing own brands and concentrating on brands.

It is a sorry tale which is in some ways similar to that of Homebase and Bunnings. But the Homebase saga took place in full view because Wesfarmers published the figures. House of Fraser was a private company and very little information was published.

Stores and closures

The quality of the House of Fraser portfolio has long been the focus of negative comment. But it was not until the CVA details were published that one came to appreciate just how big the tail of stores is. 31 out of the 59 were earmarked for closure or disposal. Mike Ashley has said that he will try to keep more stores open than that and it may well be that some of them would be suitable as Sports Direct outlets.

One of the big problems with department stores is that their size makes them very inflexible. Shopping centres move, but it is very hard for a department store to follow. That’s why stores such as Rackhams in Birmingham are now so far off-pitch. And there are other similar examples.

There were also stores that House of Fraser should never have opened – London City is an obvious example. It had also taken the decision to close Regent street (Dickins and Jones) while keeping Oxford Street. The trouble is that the Oxford street site is very long and thin with (for a department store) a very narrow frontage. The fabric is also in poor condition. So it is a little surprising that Mike Ashley has decided to keep it. But he has the financial headroom to do something with it, which HoF could not possible afford to do.

What needs doing?

House of Fraser needs money and time. In Mike Ashley and Sports Direct, it has an owner who should be able to offer both. The last few month s have been very disrupted and that must have hit customer loyalty. It will take time to recover. The chain needs money spent on it and it has to exit at least some of the stores planned for exit in the CVO.

On the merchandise front, it needs to decide where it is going to be pitched. Mike Ashley has talked about the Selfridges of the high street, with the implication that that may be even further upmarket than House of Fraser used to be. Certainly, the Flannels brand looks further upmarket and we wonder if most high streets could sustain an offer like that.

We also think that House of Fraser needs to revive its own brand offer. Own brands are important to establish a point of difference for the stores and also to help support the gross margin. One of the major impacts of the growth of online has been to cut margins of branded goods. Own brands are a way of countering that.

The stores need money spending on them both in the customer facing areas and on the fabric as a whole. One of the easiest ways to save money for an ailing retailer is to defer such investment. This is another area where we can have no real idea of the scale of the problem.

It needs management stability.

Will it work?

Mike Ashley obviously thinks so. But at the moment we have no detailed idea of what his plans for the business actually are. SanPower owned House of Fraser for just over 4 years and 2 years longer than Bunnings owned Homebase. But while we have no doubt that mistakes were made at HoF there is no evidence of mismanagement of the scale that hit Homebase. So we think that HoF is in a fundamentally better place than Homebase is to start from.

At this stage we think that HoF is lucky to have found an owner such as Sports Direct which for all the differences in operating style, should still have the financial muscle to be able to restores the business’ fortunes. And it’s worth remembering that for all its high profile, House of Fraser is a much smaller business than Sports Direct. Its last reported sales were £830 million, just a quarter of those of Sports Direct and that is before any store closures. In the latest edition of the UK Retail Rankings (April 2018) House of Fraser ranked 54th among the UK’s leading retailers and Sports Direct was number 21. With House of Fraser it would rank 16th. After store closures HoF would be around 75th.

The risks lie in the complete mismatch of trading styles. So it’s important that the two are kept well apart. There is very little possible overlap between them.

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