Debenhams tumbles on Goldman downgrade

Debenhams shares were under pressure on Thursday after Goldman Sachs downgraded the stock to ‘sell’ from ‘neutral’, pointing to slowing space growth.

“As one of the UK general retailers wrestling with the online channel shift dynamic, and in recent times suffering from store-based sales cannibalisation, while approaching the end of its UK space growth plans, Debenhams’ earnings growth outlook is modest by European retail standards,” it said.

Goldman noted around 2% earnings per share growth over 2016/17 versus around 10% for peers.

It said the group’s Christmas trading statement in mid-January and the interim results in April 2016 should underpin the bank’s earnings forecasts and cautious stance on the shares.

GS has an 83p 12-month price target on Debenhams.

Goldman also downgraded Associated British Foods, to ‘sell’ from ‘buy’ but raised the price target to 3,700p from 3,320p.

“While we recognise the international success of ABF’s Primark division, several themes have emerged over the last few quarters to dampen our enthusiasm for the shares,” said GS.

Goldman noted that Primark’s full year 2016 earnings before interest and taxes margin forecast is now down 170 basis points year-on-year, having been down 80 bps in FY15.

It said that while this is largely FX-driven, it does not expect a reversal any time soon.

In addition, GS expects Primark’s capex/sales run rate of around 5% to rise to around 7% from here, given a higher cost store opening programme.

Taken together, these financial dynamics are expected to reduce Primark’s cash generation to 4% in FY16 from 7%, it said.

At 1222 GMT, Debenhams shares were down 6.8% to 79.60p while AB Foods was 0.9% lower at 3,566p.