Dec 13, 2017
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Sports Direct downgraded to underperform

Dec 13, 2017

Increased competition from JD Sports and Decathlon and concerns about the actual performance of Sports Direct’s new format stores have prompted US investment bank Jefferies to downgrade the retailer from hold to underperform.

Sports Direct has been investing in large format superstores incorporating Sports Direct, Flannels and USC - Photo: ISG

Jefferies said it might be the right time for institutional investors to sell their stakes in the British sportswear retailer, as it expects its good fortune to run out soon.

Sports Direct shares have risen 41% this year.

Jefferies cited several areas of concern for Sports Direct, including increased competition from JD Sports in the athleisure segment while Decathlon’s value proposition is attracting cash-strapped consumers.

“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,” said Jefferies analyst James Grzinic in a note, according to Proactive Investors.

“[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.”

Jefferies also doubts that the performance of Sports Direct’s new generation of stores – larger and more visually appealing- is as good as the company is revealing. “[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,” said Grzinic.

And margins could also come under pressure due to rising costs. While Sports Direct entered into long-term hedges to protect itself from volatility risk, Grzinic doesn’t expect the favourable impact to last for much longer.

“We assume only a partial recovery in UK retail margins, to 13%,” he said.

Sports Direct also hit the headlines on Wednesday when its shareholders rejected the company’s proposal to pay Mike Ashley brother John Ashley £11m for ‘previously underpaid work’.

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