■ Company will "at least" hit full-year profit targets
■ Integration of Austrian business on track
■ Strong free cashflow
In a trading update this week, Sports Direct (SPD) chief executive Dave Forsey said the board was "very confident" of achieving "at least" its full-year underlying cash profit target of £360m. The words he used had a more positive ring to them compared with previous announcements made this year, and came as the retailer reported 2.6 per cent sales growth in the 13 weeks to 25 January and an 8 per cent increase in gross profit to £347m.
As ever, it was the sports retail division which fuelled growth: sales there rose 2.7 per cent to £643m, while profit jumped 9 per cent to £297m. Meanwhile, revenue and profit slipped in the premium lifestyle business, and the brands division reported a 5 per cent uptick in sales to £57m, but a slight decline in profit to £22.1m.
Encouragingly, the gross margin continued to build, up 285 basis points in the period. Management offered little explanation, but reduced promotions and a shift from third-party towards own-branded products probably helped. Mr Forsey said Sports Direct's focus would be on upgrading its store portfolio and integrating the newly acquired Austrian business. This acquisition has been hit by a "challenging" winter sports season across Europe, which accounts for about a quarter of group retail sales.
Cantor Fitzgerald says...
Hold. Sports Direct's strategy needs more visibility. The company has significant free cashflow, with capital spending of just £90m projected for this year. However, it does not appear to have a clear strategy to reinvest these resources. We think the focus should be on strategic acquisitions rather than on opportunistic investments, which have included acquiring interests in MySale (MYSL), Debenhams (DEB) and Tesco (TSCO). It should also develop the business more broadly overseas and grow online sales. Unhelpfully, the company still does not have a finance director. The stock trades on about 18 times our 2015 EPS forecast of 38p (based on pre-tax profit of £285m), putting it at a small premium to the general retail sector.
Espirito Santo says...
Buy. Sports Direct shares have de-rated over the past year. Some might point to the lacklustre sales figure in the recent trading update, but this view looks wrong to us and we're not sure lowering forecasts - as some analysts have done - has been the right call. Sports Direct boasts a robust business model, producing strong EPS growth even as it integrates major acquisitions. It also has far greater ability than some retailers to cope with US dollar-related cost issues over the next year. As this is one of the few long-term growth companies in our coverage, we see no reason to change our 'buy' rating, and expect to leave our 2014-15 underlying cash profit forecast unchanged at £378m.
