Goldman Sachs downgrades Sports Direct on margin concerns

Goldman Sachs has downgraded Sports Direct International to a 'neutral' rating and taken the retailer off its Pan-Europe Buy List after cutting its earnings per share (EPS) forecasts for this and next year.

"We expect the combination of a demanding European apparel demand environment, gross margin pressure and elevated opex growth due to a one-off wage bill increase to stall Sport Direct’s EPS progress in FY16, FY17 and FY18, despite the European football event this summer."

Reflecting the current demanding market and "a slower second-half sales growth trend", Goldman has cut its forecast for earnings before interest, tax, depreciation and amortisation (EBITDA) for the full year by 4% to £375m and for next year by 8% to £365m.

On top of this lower EBITDA base, Goldman said its concerns about gross margins were that the company would find it difficult to pass onto customers the recent input cost inflation being driven by currency fluctuations.

Together, this has resulted in it cutting its full year pre-tax profit forecast to £282m and further to £264m for 2017, leading to earnings per share of 36.04p and 33.76p.

The target price for the shares was also slashed to 400p from 525p.