JD Sports gets a kicking from Covid-19, but US arm prospers

Pandemic has been a tale of two halves for the bargain sports goods retailer, but online and cross-Atlantic sales look strong.

JD Sports (LSE:JD.)’ numbers overall are a mixed picture, with the pandemic providing some opportunities, but for the most part hurting the retailer as has been the case across the sector.

Even so, the positives reveal some tantalising possibilities for prospects.

On the plus side, the majority of revenues were retained as consumers switched to buying online following the closure of the store estate.

However, this came with significant additional costs, mostly linked to the fulfilment of these orders and the necessity for safety equipment and associated changes to working practices.

The outcome has been that the group was not quite ready for the accelerated pace of change to online, and equally will now need to consider how much of this change in shopping habits is permanent.

In turn, this could have implications for the company’s store estate in general, which will need careful scrutiny in ensuring that the mix of physical and online is aligned to the requirements of the consumer.

A clear beneficiary of the pandemic has been the Finish Line business in the US, which had already been showing signs of promise and that had previously accounted for around 26% of group revenues.

During this period, the fiscal stimulus provided by the US government to individuals resulted in something of a boon for retailers, as consumers used their extra spending power to trade up to new and fully priced fashions.

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As a result, revenues increased by almost 50% and gross margins improved, leading to a pre-tax profit for the unit of £73.4 million for the period. This compares to £35.7 million a year before and in sight of the full-year number previously reported of £98 million.

However, whether this boost can be repeated seems unlikely in the short term, with the stimulus package having ended on 31 July and with no agreement yet for any further measures.

Apart from the additional costs of online fulfilment, the outdoors business has proved to be something of a drain on resources, resulting in the effective repackaging of the Go Outdoors business.

The general outdoors businesses swung to a loss for the period, with a disproportionate hit to the overall profit number despite only accounting for around 6% of revenues.

Elsewhere, however, the group has accumulated a healthy cash position of £765 million versus a previous £118 million. This is due in part to the additional contribution from Finish Line, but also from a reduction in capital expenditure and the suspension of the dividend payment.

That said, JD Sports was not previously a high-yielding stock, mostly preferring instead to reinvest in the business.

Around £200 million of the net cash figure is likely to be reversed in the remainder of the year, since it relates to rent deferrals and special agreements with the suppliers.

The overall impact has been a reduction of group revenues of just 6.5% in the period, which is well ahead of expectations.

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Pre-tax profit, while also much better than expected, dropped by 68% and the company is not yet out of the woods.

JD Sports was blocked from buying shoe store Footasylum by the Competition and Markets Authority, and the appeal against this will be a management distraction. The company is also likely to suffer from any poor Brexit outcome in terms of its supply chains, which require immediate attention.

From a trading perspective, stocks remain light in view of manufacturers previously having been forced to pause production, while the general economic outlook in the UK could well prove to be another headwind.

The share price has mirrored the rollercoaster ride of the last few months, standing down 13% in the year to date, but having recovered by 147% since the March low.

Over the last year, the performance is much more positive, with the shares up 13% as compared to a decline of 18% for the wider FTSE 100 index.

With the company moving quickly to amend its online model where possible, and with the US business providing a significant tailwind in the meantime, the numbers have been well received, and the market consensus of the shares as a 'strong buy' should on balance remain intact.

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