Interactive Investor

ii view: JD Sports defies US rivals as reaffirms profit target

Significant overseas operations with new stores being opened. We assess prospects.

21st September 2023 11:49

by Keith Bowman from interactive investor

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ii view: JD Sports hits record high amid profit optimism

First-half results to 29 July

  • Total revenue up 8% to £4.78 billion
  • Pre-tax profit and adjusted items down 2.6% to £373.5 million
  • Interim dividend of 0.30p per share, up from 0.13p 
  • Net cash up 26% to £1.27 billion

Guidance:

Continues to expect full-year profit before tax and adjusted items to prove in line with City estimates of around £1.04 billion

Chief executive Régis Schultz said:

“Looking ahead, our core consumers remain resilient in the face of the ongoing global macro-economic challenges. The JD brand continues to strengthen its global presence, supported by our strategic partnerships with much-loved brands and our strong balance sheet."

ii round-up:

Global sports retailer JD Sports Fashion (LSE:JD.) today detailed first-half results broadly in line with City estimates as it reiterated hopes for annual profit to rise around 5% to more than £1 billion.

Sales for the six months ended late July rose 8% year-over-year to £4.78 billion, with early second-half sales up 10%, defying recent downbeat trading updates from US rivals Foot Locker Inc (NYSE:FL) and Dick's Sporting Goods Inc (NYSE:DKS)

Shares in the FTSE 100 company rose 6% in UK trading having fallen by around 12% over the last month. Foot Locker and Dicks Sporting Goods are both down by more than a fifth over that time, similar to trainers giant Nike. The FTSE 100 index itself is up 6% over the last month.  

JD, whose brands include Size?, Finish Line and ShoePalace, pointed to improved US trading in July compared to a slow June. A lack of new product releases in June contrasted with strong 'back to school' sales in July.

North American sales for the half-year rose by almost a fifth to £1.39 billion, but that growth was exceeded by a near one-third increase in Europe year-over-year to £774 million. UK and Irish sales improved 8% to £1.2 billion. Asia Pacific sales gained by just over a fifth to £231 million. 

Adjusted group profit for the period fell 2.6% to £373.5 million despite its gross profit margin remaining robust at 48%, although down from 48.5% this time last year, given ongoing investment expenditure and increased marketing spend. 

Broker UBS reiterated its ‘buy’ stance on the shares post the results. A further trading update is scheduled for mid-January. 

ii view:

Headquartered in Bury, Manchester, this FTSE 100 retailer operates over 3,300 stores in over 35 different countries. Employing around 75,000 people, footwear generates most of its sporting sales at just over half, followed by apparel at just over a third and accessories much of the balance. JD also operates outdoor brands in the UK such as Blacks, Millets and Go Outdoors accounting for around 5% of overall group revenues.  

For investors, the still challenging backdrop for consumers globally, including heightened interest rates, cannot be ignored. Costs generally for businesses remain elevated, sporting goods makers such as Nike are looking to build on their own direct relationship with consumers, particularly online, while a forecast dividend yield of under 1% contrasts with yields of over 4% elsewhere in the retail sector.

On the upside, both brand and geographical diversity are strong, and new stores continue to be opened, with more than 200 scheduled during the second half. Bolt-on acquisitions are still being found as shown by its recent acquisition of French sportswear retailer Courir. JD’s relatively young customer base, potentially living with their parents, arguably remains less exposed to current economic challenges, while its balance sheet looks robust with over £1 billion of net cash held. 

On balance, and despite ongoing risks, growth potential plus a consensus analyst estimate of fair value at over 200p should be enough to keep long-term fans onboard.  

Positives: 

  • Diversity of product, brand name and geographical location
  • Continued new store openings 

Negatives:

  • Uncertain economic outlook
  • Subject to currency movements

The average rating of stock market analysts:

Buy

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