Sports Direct International (LON:SPD) should return to earnings growth in 2018 following the closure of loss-making European stores and its UK expansion plans, according to Goldman Sachs.
Goldman Sachs raised its rating on the sportswear retailer to ‘neutral’ from ‘sell’ and lifted the target price to 350p from 250p following last week’s full year results.
The company reported a 58.7% drop in 2017 pre-tax profit to £113.7mln, dragged down by a weaker pound against the dollar. Underlying earnings (EBITDA) dropped 8.5% to £272.7mln but Sports Direct said it expects EBIDTA growth of 5-15% in fiscal year 2018.
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Goldman predicts earnings per share (EPS) to rise 10% to 14.2p in fiscal year 2018 from 11.4p the prior year and flat pre-tax profit.
“This represents a 28% increase in our FY18E EPS, and our FY18E adjusted free cash flow (FCF) per share is down 28% to 15.2p,” Goldman said.
“In the context of a return to EBITDA progress from here, we believe an adjusted FCF yield in line with peers (2018 circa 5%) is credible, driving a 350p 12-month price target and a neutral rating (from sell).”
In the upgrade to its earnings forecast, Goldman cited Sports Direct’s plans for expansion, having invested £317mln in property assets with the view to open more flagship stores in the UK. Goldman also highlighted the company’s share buyback programme with about 5% acquired in 2017 and a further 5% so far in the current financial year.
Upside risks to Sports Direct include better-than-expected trends in like-for-like sales and its ability to offset input cost pressures, Goldman said. The group has put in place hedging arrangements to minimise the short-term impact of currency volatility and input costs.
Downside risks, however, include the loss of market share to competitors such as Amazon and weaker UK consumer spending. Rising inflation, fuelled by a weaker pound after the Brexit vote, has put a squeeze on consumers and hence UK retailers have seen a slowdown in sales.