England football shirt group Umbro issued its third profit warning in three months — and blamed discount sports chain Sports Direct, run by billionaire Mike Ashley, for its latest problems.
Umbro claimed that Ashley's retail chain has refused to take delivery of 1.3m England shirts which it is contracted to buy. The vast unwanted stock is now sitting in an Umbro warehouse and will wipe £15m — or 70% — off Umbro's expected profits.
The kit company issued a profit alert in September blaming the England soccer team's poor performance, and another the day after the team failed to qualify for Euro 2008. However, its share price has been propped up as a result of a 195p-a-share takeover agreed with US sports group Nike in October, which values Umbro at £285m.
That deal had been put in jeopardy after Ashley snapped up a 29.9% stake in Umbro, which could have blocked the takeover.
However, just hours after the Umbro profit warning, Ashley cleared the way for Nike to buy Umbro when Sports Direct sold its entire stake to the US sports group. It made a profit of some £15m on its dealings.
Sports Direct is Umbro's biggest customer and has an agreement with the kit company to take 65% of the shirts destined for UK stores. Under the terms of that contract Sports Direct was supposed to buy 1.8m England shirts this year, but has so far accepted just 500,000.
Umbro said the dispute would "have a material impact on revenues for the current year", which ends on December 31.
Analyst John Stevenson of Shore Capital estimated that profits for this year would fall to just £5.7m, compared with the £21m he had previously expected. Last year Umbro made £26m.
Umbro said it was "reviewing all options" in a bid to resolve the issue and would not rule out legal action against its biggest customer.
The bottom has fallen out of the market for England shirts this year. Sales suffered after last year's bumper World Cup trade and the England team's patchy performance, followed by its ejection from Euro 2008 last month, have seen sales almost completely dry up.
Umbro has cut its anticipated production of 3m shirts next year to just 1m, but Ashley indicated earlier this week that Sports Direct was unlikely to want its contracted 650,000 of that total.
"That's still an awful lot of shirts for England not qualifying," said Ashley after unveiling poor half-year results for Sports Direct. "If there's no home championship, are you going to go out and buy an away shirt? I've got every England shirt, but I won't be buying one."
Ashley owns 68% of Sports Direct and has said he wants credit notes from Umbro for unsold stock.
The Umbro stake, Ashley said earlier this week, was designed to buy him "a substantial seat at the table" in the negotiations with Nike.
Sports Direct, he said, got better buying terms from Umbro than Nike and wanted to ensure they did not change. He said he would oppose the Nike takeover "if it changes our terms negatively".