Sports Direct (SPD) is among the bigger fallers today after surprise losses on foreign exchange hedging contracts led analysts at Cantor Fitzgerald to downgrade profit estimates.

Accident-prone Sports Direct, after a run-in with politicians over working practices at a warehouse in Derbyshire, flagged losses on a sterling-dollar forex contract after the flash crash in sterling on 7 Oct.

The botched trade aimed to protect Sports Direct from a falling currency but has in fact left it with around £30m of losses so far.

And there could be more trouble ahead writes retail analyst Freddie George at Cantor Fitzgerald, who has downgraded profit estimates for the company.


Sports Direct – Key financials (£m)    
  2015 2016 2017e 2018e
Sales 2,833 2,904 3,170 3,270
Operating profit 302 276 156 180
Pre-tax profit 300 275 150 175
Adjusted EPS 38.9p 35.6p 19.8p 22.8p
DPS 0p 0p 0p 0p
Source: Cantor, 12 Oct – year-end: Dec    


'Trouble comes in threes but in the case of Sports Direct it is at least sixes,' says George in a note published today.

'The news is obviously disappointing as many forecasters would have predicted further such falls in sterling against the dollar.

'However, the company is not out of the woods yet and faces further possible downgrades to earnings. It is also radically changing its strategy, which is not without risk. It will lead to an increase in debt levels eliminating the chances of a dividend increase and buyback in the medium term.

'In the meantime, the company will have difficulty shrugging off its discount heritage; the currency-led downgrade, in our view, represents a step down in profitability while the stock is now not 'stand-out' value on the basis of our revised forecasts.'

Pre-tax profit estimates were downgraded from £185 million to £150 million.

Cantor analyst George continues to favour Sports Direct rival JD Sports (JD.), which trades at a similar multiple of earnings 'and has the unequivocal support of the brands, Nike and Adidas, and has clearer visibility on its strategy.

Shares in Sports Direct trade 3.9% lower at 282p.

Issue Date: 12 Oct 2016