Sports Direct wrangles with House of Fraser suppliers

Sports Direct, after acquiring House of Fraser for £90m out of administration last Friday, revealed the decision to cancel online orders and offer refunds to all customers via Twitter overnight.

This came a day after it hit the off button on the houseoffraser.com website due to House of Fraser's US-owned warehouse operator, XPO Logistics, having “paused” processing orders because of a payment dispute.

This week Sports Direct boss Mike Ashley said he aimed to keep 80% of House of Fraser stores open, but the company reportedly wrote to more than 1,000 of the department store group's suppliers, including XPO, to say it will not cover money owed before Friday's 'pre-pack' acquisition from the administrators.

A 'pre-pack' insolvency deal allows the buyer to pick up assets but not pay pension liabilities and other unsecured claims, meaning Sports Direct has no legal obligation to pay suppliers money owed before Friday's deal. Administrator EY would be expected to pay supplier debts, but almost all the proceeds will be soaked up by the demand's of banks and bondholders.

Connecticut-headquartered XPO, which operates HoF's warehouses in Wellingborough and Milton Keynes, has halted work as it tries to persuade Sports Direct to honour its existing contract terms.

There is speculation that XPO is owed "tens of millions of pounds", The Times reported, while Sports Direct sources told The Guardian said the XPO was being “totally unreasonable in terms of their demands” and was “refusing to engage in any process” .

Other House of Fraser clothing suppliers have taken action as they negotiate over payments. According to reports, fashion brands Jigsaw, Karen Millen and Mint Velvet have removed some stock from their House of Fraser concessions.

Another concession operator told the Guardian it was continuing to operate as it hoped a deal could be agreed.

Earlier this week, after Ashley said he planned to keep as many stores open "as possible", analyst Jonathan Pritchard at Peel Hunt said Sports Direct was refusing to engage with City analysts over the "fascinating" deal.

"It's hard to put any numbers behind what has developed over the past few days, although the likely scenario sees the HOF planned store closures go through, leaving Sports Direct with nearly 30 sites to contend with," he said.

"Of course on the face of it, £90m could be a steal but debt is rising at Sports Direct and so is the pressure on management bandwidth. We don't share the view that the gentrification of the core stores is 'job done', even if the new flagships look great. We will give the shares the benefit of the doubt for now, recommendation wise, but we'd actually love to be more bullish, if only management would meet us half way."