Sports Direct International PLC’s (LON:SPD) institutional investors should look at selling their stakes in the sportswear retailer, according to Jefferies.
The American investment bank said the time might be right for the likes of Schroders and Artemis to cash in, with the shares’ 41% rise so far this year presenting a “long-absent exit opportunity”.
READ: Sports Direct chairman Keith Hellawell narrowly survives shareholder revolt
Jefferies analyst James Grzinic doesn’t expect that run to continue for much longer though, citing concerns over competition, margins and management.
Increased competition
Grzinic says Sports Direct is caught in a bit of a limbo at the moment in that it is struggling to compete with JD Sports Fashion PLC (LON:JD.) in the lucrative sports fashion and athleisure markets, while the rise of Decathlon in the UK is putting its core value proposition under attack.
“We struggle to see SPD make real inroads into JD Sport's fashion positioning (while the threat from Decathlon continues to grow at the discount end,” wrote the analyst in a note on Wednesday.
“[Decathlon] has up to now taken a very gradual approach to UK expansion, so much so that it still operates only 36 stores in the UK, almost 20 years from its UK launch.
“However, the pace of growth of this remarkable value leader has stepped up significantly, with as many as 10 stores having opened in the UK in 2017.”
New store performance ‘underwhelming’
Aside from competition, Grzinic also thinks the performance of Sports Direct’s ‘new generation’ stores might not be as good as the company would have you believe.
The FTSE 250 group said back in September that the bigger, more visually appealing shops were trading ahead of even its own expectations, but the analyst has his doubts.
“[Their performance] is hard to audit given the lack of details; however, average EBITDA densities of new flagship stores appear in line with the UK average, which we think underwhelming.”
Margins under pressure
Margins are also an issue for Sports Direct, according to Grzinic. Most retailers have seen margins come under pressure given rising costs and an inability to pass all of those on to cash-strapped consumers.
Sports Direct has arguably been shielded from this somewhat given that it entered into long-term hedges a few years which meant it sourced its own brand goods at an effective rate of US$1.70 for every £1 – significantly better than where it has been for the past year or so.
Grzinic doesn’t expect that boon – which temporarily boosted gross profits by £100mln – to last for much longer though.
“We assume only a partial recovery in UK retail margins, to 13%.”
Given those issues, Grzinic downgraded the stock to ‘underperform’ from ‘hold’, although he did raise his price target slightly to 290p from 265p.
Shares dropped 2.4% to 379.8p on Wednesday morning.