JD Sports can prosper from structural change in retail sector

This update is light on forecasts, but our head of markets explains why the shares remain popular.

JD Sports Fashion's (LSE:JD.) meteoric rise may have come to a grinding halt as a result of the pandemic, but its attractions remain in light of its plans for further expansion.

JD Sports had been on something of a tear, with increasing international aspirations, and a 30% increase in revenues for the 52 weeks ended 1 February 2020 was comfortably in excess of market expectations.

Pre-tax profit increased by a more pedestrian 3%, although the number was light of expectations. 

The company’s net cash position increased significantly to stand at £430 million, from a previous £125 million, with access to much liquidity underpinning its financial strength.

In addition, the removal of the dividend was taken as a prudent decision, although to date the company has not been a generous dividend source, preferring to reinvest in growth opportunities in the business itself.

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Historically, UK retailers have a poor track record in trying to crack the US market. For JD Sports, however, prospects are presently encouraging, with the Finish Line business reporting an operating profit of £98 million on increased stores and online sales of 9%.

Now accounting for 26% of group revenues, (UK 42%, Europe 26%) the US is becoming an increasingly important market for the group and further expansion is planned.

However, the results cover the period to 1 February and, as such, shine next to no light on the current situation.

JD Sports references Covid-19 ramifications throughout the release without attributing any numbers to the financial impact, save that it is likely to be material.

An immediate casualty of the pandemic was its Go Outdoors unit, where a business which had been struggling was brought into sharp focus, with the subsequent administration and restructure, including an impairment of £90 million for the goodwill line.

At the same time, the situation with Footasylum continues to occupy management focus, with JD Sports likely to appeal for a Judicial Review of the currently prohibited merger.

The additional cost and time of the review is an unwelcome development in the current situation and the outcome is unclear, despite JD Sports’ protestations that the decision failed to take account of a rapidly evolving competitive landscape.

Source: TradingView. Past performance is not a guide to future performance.

The company’s own outlook for the immediate future is mixed. As has been seen with other retailers, city centre stores and shopping centre outlets are suffering from a severe lack of footfall, especially at weekends.

This is partly offset by the company’s out of town presence in retail parks, where consumers are browsing less and rather more likely to purchase the required items immediately. Even so, there will be some “gross margin sacrifice” as certain lines of stock will be sold at knock-down prices for either seasonal or fashion reasons.

Of particular interest, and again without the provision of any revenue figures, is the fact that the company was able to continue trading throughout due to its strong online offering.

The company has been able to regain some of its former momentum since its stores have now reopened, but there is now a question of how the mix of physical and online shopping will evolve, and the implications that could have on the company’s store portfolio.

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The somewhat sketchy nature of the pandemic outlook and effect has resulted in an unsurprisingly volatile share price. JD shares are down 17% in the year to date but have recovered by over 40% since the March lows of the general market meltdown. 

Over the last year, the shares have shown an impressive gain of 8.5%, which compares to a decline of 17% for the wider FTSE 100 index. If JD can regain the pace and scope of its previous expansion, the market consensus of the shares as a ‘strong buy’ could well be maintained.