JD Sports Fashion wrong-footed in Q3

JD Sports Fashion (LSE:JD.)’ fortunes were long overdue a break, but this update misses such an opportunity by a fair margin.

Indeed, the statement equates to another profit warning amid an unrelenting environment. Back in January at the Christmas trading statement, the group reduced its full-year pre-tax profit forecast to a range between £915 million and £935 million from a previous £955 million to £1.035 billion. The number was reduced further to £878 million at the halfway point, and is now expected to be at the lower end of a range between £853 million and £888 million.

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While the group describes the lower forecast as a “pragmatic approach” given rising unemployment on both sides of the pond, weakening consumer sentiment and an ever-present level of intense promotional activity within the sector, the news comes as a blow to patient investors.

The strategy remains intact, but the delivery is proving to be a stumbling block. The most promising and obvious opportunity in the medium term is JD’s growing brand presence in the major US market, which accounted for 37% of third-quarter sales and is now the group’s largest region. JD’s £900 million acquisition of US retailer Hibbett, which should further propel brand awareness, especially in the southeastern corner of the country, is showing some signs of traction. North American like-for-like sales in the third quarter declined by 1.7%, an improvement from 2.1% in the second, but leading to a drop of 2.9% in the year to date.

Within Europe, the £450 million purchase of French retailer Courir is complete, although like-for-like sales overall in the region have fallen by 0.6% this year and by 1.1% in the third quarter. Given that Europe accounts for 35% of overall sales, this is a meaningful decline. Most of the balance comes from the UK, accounting for 24% of overall revenues but where sales fared little better, with a drop of 3.3% in the third quarter, albeit an improvement from 4.5% in the second, leading to a decline of 3.3% in the year to date.

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At the same time, the group has needed to sacrifice some margin with promotional activity of its own to stem the sales decline, resulting in a drop of 0.4% in gross margin in this period, and 0.6% in the year to date. By way of mitigation, the headline figures which include the contribution of the recent acquisitions revealed that total sales had increased by 8.1%, although stripping these out like-for-like sales dipped by 1.7% to £2.95 billion.

JD is putting a brave face on the situation and points to the progress it has been making apart from the acquisitions, which may have limited the share price decline at the open.

Going into its peak trading period the group has upgraded its e-commerce capabilities, improved its global supply chain and automated one of its larger distribution centres. The company maintains that it has a strong product line-up ahead of the festive season, while in terms of overall financial health the group is expecting strong free cash flow and expects to complete its £200 million share buyback programme.

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For the moment, JD Sports has been wrong-footed by the current backdrop and the share price has missed the UK market rally as a result. The shares have declined by 31% over the last year, as compared to a gain of 17.6% for the wider FTSE100 and by 42% over the last two years.

Even so, there remains some lingering hope from investors given the green shoots which the acquisitions bring, while the faltering price has left the shares on an extremely lowly valuation in historic terms. Some may see the weakness as a potential entry point, and the market consensus of the shares as a cautious buy reflects some guarded optimism.