JD Sports Fashion PLC (LSE:JD.) shares dropped close to 4% on Monday after it was downgraded by analysts at Deutsche Bank, who argued the market is overstating its earnings and ability to generate cash.
Deutsche Bank lowered the fashion retailer’s rating from ‘hold’ to ‘sell’ and downgraded its share price target from 115p to 110p as it continued to dispute its guidance and free-cash-flow yields.
The broker said its forecasts for the sports clothing group’s earnings are nearly 6.5% lower than the bottom of its guidance range.
Management’s full-year organic revenue guidance for 2025 is 6% higher than what Deutsche Bank predicted, analysts said, adding that like-for-like sales were expected to be flat.
“Whilst we see potential for positive surprise in gross margin, as promotional intensity eases, subdued overall category spend tampers our enthusiasm,” said Deutsche Bank.
Looking further down the group’s profit and loss sheet, the German bank also noted concerns about the company’s hope that it can grow operating expenditure.
JD Sports plans to increase opex by a low single-digit percentage, but analysts argued this looked “tight” due to the context of space growth and cost inflation.
Zooming in on free cash free cash flow, analysts claimed the market has failed to capture the cost of its growth, pointing to a 350-basis point gap between depreciation/amortisation and capex.
“This is evident in deteriorating cash conversion, and as it inevitably closes with time, will present a headwind to margins,” Deutsche Bank concluded.