Goldman Sachs reiterates sell on Debenhams on expected drop in like-for-likes

Pointing to the likelihood of declines in the company’s like-for-like sales and pressure on gross margins as a result of foreign exchange headwinds in fiscal years 2017 and 2018, the broker said “Debenhams’ earnings growth outlook remains modest by European retail standards”.

Like-for-likes would fall as a result of the company’s clothing market online penetration rate, the broker said.

Those two factors led analysts Richard Edwards, Abhilash Mohapatra and Natasha de la Grense to the conclusion that the firm’s earnings per share would be flat from here.

In a research note sent to clients on Wednesday, but dated 22 June, the analysts revised their estimates for the company’s earnings per share in 2016 from 7.76p to 7.37p, for 2017 from 8.15p to 7.70p and for 2018 from 7.89 to 7.44.

As a result of the changes to its short and medium-term forecasts the broker cut its target price on the shares from 80p to 70p and calculated that the stock was now trading on a 2017 EV/EBITDA multiple of eight times, down from nine.

In the longer-term, Goldman’s analysts also said they expected store-based sales cannibalisation to result from the shift to its online channel, driving further declines in earnings.

Goldman stood by its ‘sell’ recommendation on the shares.