Sports Direct underlying profits spur Liberum upgrade, others unconvinced
Sports Direct's headline profits may have tanked 73% but underlying numbers were much improved and some analysts felt the shares deserved a higher rating, though others continued to remain unconvinced.
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Earnings before interest, tax, depreciation and amortisation increased 12.2% to £306.1m and adjusted profit before tax rose 34.5% to £152.9m, which was well ahead of consensus forecasts for £295m.
"When one considers the heavy lifting as the strategic shift to the elevated store and online offering continues and the retail backdrop during the year, this is a commendable achievement with revenues marginally higher," Liberum said, upgrading to 'buy' from 'hold' and upping its share price target to 520p from 400p.
"A tight control on costs and benefits from infrastructure investment and automation has started to deliver efficiencies in the UK and Europe, delivering a 167bps improvement in operating margins."
"A strengthened senior team, a focussed and disciplined strategy that places property and brands at the very centre should result in increased customer loyalty, frequency of visit as merchandising, availability and product lines improve over the next few years."
Peel Hunt's Jonathan Pritchard said it was an "impressive performance given that trading conditions were difficult in H2, and management has clearly got a strong grip on its cost base as there is nothing terribly eye-catching in the sales numbers".
He said management's "obsessive" attempts to elevate product and raise store standards is working, but it comes from a low base: "Sports Direct is the naughty kid who used to be in detention every week and is now mending his ways -there’s a long way still to go to become the real teacher’s pet of the brands. Indeed, we believe that Sports Direct’s attempts at elevation have a ceiling."
Looking at the outlook statement, he said the new financial year will clearly have got off to a good start with the good weather and England's run in the World Cup, with management sufficiently confident to suggest another 5-15% growth rate in EBITDA.
He upped his forecasts for this coming year's EBITDA number to £315m from £295m and next year's to £340m from £320m, moving his share price target to 450p but kept his rating at 'add'.
"The shares have done well recently and discount some of this good news from a PE in the 20s for this year. However, the momentum is unlikely to stop today."
There was a tentative reaction from analyst Tony Shiret at broker Whitman Howard saw underlying profits and net debt both as positives, with the latter at £397m versus its expectation of £550m-plus, and upgraded its
"There is no indication re FY19 other than the existing strategies of opening of major stores and closure of smaller ones will continue. Much of the action and optionality in these shares lies in the investment strategy in other companies," Shiret said.
"Here the Debenhams situation remains opaque and previous non-UK Sports Retail strategy has been un-successful. It is difficult to be precise here but the best opportunity in our view remains re-achieving better profitability levels in the UK Sports Retail business."
As such, Shiret was unable to be very definite on Sports Direct's investment attractions: "Valuation may or may not be demanding – it is on the basis of the existing operation and performance."
RBC Capital Markets was more firmly negative, keeping its rating at 'underperform' with a 325p target price as it believes "it will be challenging to execute on its strategy to upgrade its brand and store portfolio in the UK and SPD may face dollar sourcing pressure again later next year owing to the recent fall in the £ versus the USD".
International expansion has proved "more challenging than we expected", RBC said, with the company facing pressure from higher labour costs and expecting return on capital expenditure to come under further pressure "as capital intensity rises as a result of SPD's acquisitions of freeholds and as it moves more into premium fashion".