Sports Direct's house broker says 'sell'

Sports Direct, the company behind Dunlop and the Sports World retail chain, saw its shares tumble yesterday as house broker Merrill Lynch downgraded the stock to "sell", telling investors that "fundamental issues of quality, visibility and sustainability remain unaddressed".

The bank, which along with its joint broker Credit Suisse floated the company on the London Stock Exchange in February, issued a 14-page note, saying that "in the absence of any detailed guidance or discussion of underlying estimates" it was cutting its 2008 and 2009 earning estimates for the group by 30 per cent. It cited a recent profit warning from the company which said results for the current financial year were likely to trail those achieved last year.

"Investors appear to have held on to a combination of hopes," wrote Mal Patel at Merrill, "that this is a uniquely scaleable and sustainable business model; that its impressive historic performance must count for something; and that improved communications and strengthened corporate governance would drive a re-assessment of the business. Unfortunately, the evidence of the past 10 months has offered little to sustain these hopes."

Mr Patel set a fair value of 80p for Sports Direct shares, which lost 5p to close at 96.75p yesterday. The note, which comes a week before a Sports Direct extraordinary meeting is due to be held at the Merrill Lynch offices in London, said there was "little merit" in holding on to the company's shares and slammed the management, demanding "a better articulated strategic vision rather than the desire to be 'the most profitable sports retailer in the world'".

The note also said that recent changes in the company's structure had borne challenges for the management. In a section titled "Entrepreneurship vs Stewardship", Mr Patel wrote that "... the group as now assembled is a recent construct... the very different demands of a public listing could compromise the entrepreneurial risk-taking approach of management to date."