Can Sports Direct earnings justify the share price bounce?

After a 100% rally in the shares, is Sports Direct now at risk of a fall, thanks to the tough outlook for the UK High Street?

When is Sports Direct’s earnings date?

Sports Direct publishes first-half (H1) earnings on 16 December.

Sports Direct earnings - what does the City expect?

Earnings at Sports Direct have been under pressure since 2017, when a sharp drop followed a deterioration in the overall consumer spending environment. The situation is not expected to improve significantly in coming years either, putting some pressure on the share price.

In July, the firm reported a drop of 6% in core earnings, and it added that a fine of €674 million was expected from Belgium’s tax authority. The firm will also rebrand as Frasers Group from 16 December, reflecting the broader retail interests of the group following Mike Ashley’s purchase of stakes in the likes of House of Fraser and others. It is not clear whether this diversification is actually providing a meaningful uplift in performance, given the tough outlook for the UK High Street.

Sports Direct currently trades at 17.4 times earnings, above the five-year average of 15.4, and the highest level since the third quarter (Q3) of 2018.

How to trade Sports Direct’s earnings

Only three analysts cover the stock, and of those one has a ‘buy’ recommendation, and two are ‘sells’. The target price is 300p, 13% below the current price of 342p.

Volatility in Sports Direct peaked in late July, when the shares bottomed out around 180p and the 14-day average true range (ATR) hit a peak of 15.3. Since then it has declined, to a current 8.4, representing a move of 2.4%. On 26 July when FY earnings were released, the shares dropped by 3.7%.

Sports Direct – technical analysis

Shares in the group hit a low in late July, but this marked the nadir and since then a steady recovery has taken place. Higher lows and higher highs confirm the strength of the rally, which has seen the price double since its July low. Trendline support from the July low has come into play around 340p. Below 329p the price may well push on to 303p, support from late October.

Good news in the price for Sports Direct?

The doubling of the shares since the summer low points towards a much more optimistic outlook for Sports Direct. But now it needs to live up to expectations. The shares are no longer cheap, and a clearer strategy needs to be put in place if the rally is to be sustained in the longer term.

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