How did this happen? A combination of German air supremacy and extraordinarily bad decision-making by the British.
Operating without battleship cover (their battleships had been hit hard in recent turns by the Luftwaffe), the British flotilla interposed itself to thwart an invasion, hoping to get inside the gunnery range of the Scheer, Schlesig-Holstein and Schlesien. This did not happen, and the Sheffield was sunk before they could close.
In real life, Churchill admitted that England would have sacrificed its navy to thwart an invasion attempt, but this bordered on the Charge of the Light Brigade. The disaster has forced the UK to recall several battleships from the Atlantic and Gibraltar in order to protect the home country, and it's interesting to speculate how this would affect the war.
The good news is that the German navy has to resupply to escort the invasion force, and in order to do that, they must sail back to Germany, go to port, and return. This means that an invasion will begin no earlier than late October or even November, and there is a good chance that by that time, the weather will make an invasion attempt prohibitive. The Royal Navy will be able to reassemble some sort of counterforce by this time (the beastly coastal guns of Calais notwithstanding), and the RAF bombing of German shipping will continue.
If the battle ended right now, it would be somewhere between a major and decisive German victory.
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