Interactive Investor

Stockwatch: what I’d do with JD Sports, Clarkson and Topps Tiles

It’s not been an electric start to the year and there’s been a very mixed reaction to corporate updates, but analyst Edmond Jackson isn’t worried. Here, he explains why and how he’d respond to latest results.

5th January 2024 11:26

Edmond Jackson from interactive investor

As 2024 kicks off, there are three key hurdles for stocks to clear if sentiment is to hold. 

First, will Christmas period updates from retailers show consumer spending reasonably intact or falling?  

Second, will year-end pre-close updates more generally show performance is in line with recent guidance?  

Third, is inflation really coming down or will interest rates need to stay higher for longer, contrary to recent market expectations? 

Remarkably, in the last few days, shipping costs from Asia to Europe are cited to have risen up to 300% due to re-routing from Red Sea attacks. Prices on many goods seem likely to rise too. On Wednesday, I bought petrol in anticipation it will go up before I need it soon.  

But in this first week of corporate reporting, I am not unduly perturbed. Higher interest rates have necessarily had some effect on discretionary consumer spending, as was the Bank of England’s intent to cool inflation.  

A 23% drop in JD Sports Fashion is no shock 

I regard yesterday’s slump in the price of JD Sports shares as an indicator of stock market complacency, of recent rose-tinted sentiment, rather than much being fundamentally wrong in consumer spending. 

Interestingly, the chart for JD Sports Fashion (LSE:JD.) shares has surrendered all its rally from mid-October, when many stocks took off as the market priced for lower interest rates in 2024. Unless it recovers a bit after this “shock” profit warning, JD is back in a downtrend since last February.  

The profit downgrade was material for its last year to 3 February 2024: down from the £1.04 billion expressed at September’s interim results to a £915-£935 million range. Like-for-like sales growth in a key 22-week period was slightly behind expectations, thus heavier discounting compromised margin. Mild early autumn weather was also blamed, which yes could have affected seasonal clothing ranges, but I recall how Marks & Spencer Group (LSE:MKS) used to say the same thing. It can be a cover for less-astute marketing. 

Perhaps one element is JD’s relatively younger clientele feeling the pinch more than a generally older one for Next (LSE:NXT), which by contrast has upgraded expectations after its sales rose 5.7% in the nine weeks to 30 December. Next’s sweaters and coats also seem a more reliable sales proposition than the latest sneakers. Its management is also sufficiently confident to offer revenue guidance for the year ahead, albeit cautiously at 2.5% growth in “full-price” sales and 6% total sales.  

Lack of a meaningful yield is also why JD got clobbered. Despite its drop, the dividend yield remains sub-1% versus a near-term price/earnings (PE) multiple around 10x based on latest guidance.  

Management is maintaining ambitious goals for international growth and, despite a strong profile of free cash flow, earnings cover for the dividend dropped from around 20x to low single figures. Recent expectations for near 15x cover going forward will also have to be revised down. 

JD Sports Fashion - financial summary
Year end 30 Jan

 20162017201820192020202120222023
Turnover (£ million)1,8222,3793,1614,7186,1116,1678,56310,125
Operating margin (%)7.310.19.47.37.06.28.45.0
Operating profit (£m)133240296346427385721510
Net profit (£m)97.6179232262246224370143
EPS - reported (p)10.018.44.85.45.14.67.22.8
EPS - normalised (p)13.019.15.15.96.86.47.810.6
Return on equity (%)28.838.335.129.422.118.323.47.0
Return on total capital (%)30.137.231.326.513.710.713.98.7
Operating cashflow/share (p)23.228.77.07.817.52224.621.0
Capital expenditure/share (p)8.69.03.83.93.62.74.97.0
Free cashflow/share (p)14.619.73.13.813.919.119.714.0
Dividend/share (p)1.51.60.030.030.010.30.40.8
Cash (£m)2162483482514669641,3141,583
Net debt (£m)-209-214-310-1251,5631,1341,057870
Net assets (£m)3825527701,0091,2191,2391,9262,120
Net assets per share (p)39.356.715.820.725.125.537.340.9

Source: historic company REFS and company accounts.

In a medium-term context, and from the outset of Covid, JD became highly volatile and has struggled to anchor its market value, but the outlook for spending on its merchandise has got trickier. 

Possibly, there will be some element of near-term stock recovery given yesterday’s news was quite a shock – at least to optimists prevailing in the stock market recently. But I am inclined to see how inflation, interest rates and consumer behaviour pan out. A “buy” stance could be premature. Hold.   

Food retailers likely to show resilience  

Sainsbury (J) (LSE:SBRY) and Tesco (LSE:TSCO) each rose nearly 2% yesterday, sustaining a rally since early autumn, as the market anticipates firm Christmas updates. 

But, just as it was rather naive to assume growth at JD Sports Fashion, near double-digit like-for-like revenue growth at the grocers is assured, chiefly due to food price inflation. Various reports championed Aldi achieving 8% growth and Lidl 12%, but only Lidl has appeared to genuinely take share rather than reflect price rises.

I would therefore mind, regarding the main listed food retailers, these stocks have risen to what could now be fair ratings – especially if the story on food shifts in due course to higher transport costs and possibly shortages (according to events in the Middle East). 

They might also have benefited this week from an aspect of New Year portfolio rotation into “defensive” stocks as technology sold off in the US, albeit a market technical influence rather than corporate fundamentals. 

Shipping firm Clarkson provides a bright spot 

While mentioning transportation matters, it is pertinent to note both strong equity and underlying performance from mid-cap Clarkson (LSE:CKN)

After declining from around 3,350p last March to 2,550p in October, the stock has soared, gaining a further 2% to 3,265p this morning after a year-end update affirmed strong trading through the final quarter, with annual results ahead of market expectations.  

Versus recent consensus estimates for near £74 million net profit, management cites “not less than £108 million” at the pre-tax level which looks a high single-digit percentage beat, assuming 25% corporation tax. 

The stock’s 15% fall from last June to October belied the 7 August interim results declaring a 35% earnings per share (EPS) boost and “continued confidence in the medium-term outlook”. 

Shipping equity I find tricky to judge. Not only are you trying to guess global economic demand but also cyclical industry trends, especially supply that affects rates. Perhaps others do too, which is partly why trend-following can be influential. 

Likewise, the upshot from Middle East disruption could be mixed, possibly cancelling some options but creating others, and possibly higher rates overall. 

The stock’s June to October decline was really about fear of global slowdown, hence the crux remains - are the full effects of recently higher interest rates yet to manifest, or they will be fleeting and market pricing “looks through” to better times ahead? But what if inflation rekindles in months ahead? 

On a circa 13x forward PE and 3% yield with 2.5x earnings cover, Clarkson looks fairly priced. However, its steady (if volatile) rise from around 400p at end-2008 reflects a well-run operation. If you own it, well done and best continue to do so. Hold.  

Topps Tiles has always been sensitive to changes in spending 

Small-cap Topps Tiles (LSE:TPT) fell 6% to 46p in response to yesterday’s update citing group sales 4% easier in the 13 weeks to 30 December. Like-for-like sales ended the first quarter to December down 7.1%, continuing the trend seen in the first eight weeks. Sales to trade customers are proving more resilient than to homeowners. 

I have been aware of Topps Tiles during its 20-plus years as a listed company (founded in 1963) and its revenues can magnify consumer demand generally. In which case, and unless higher interest rates persist to weigh on consumers in 2024, Topps indicates there is no real “downturn”.  

My concern for anyone holding the stock is it still being a £100 million company after all this time, and with good products. Maybe that implies Topps will eventually get bought and integrated into a larger operation should such scope exist. 

I would thus rate it a “strong hold”, also given a modest circa 10x forward PE and mid-single-digit yield, even if one downgrades consensus for over 50% dividend growth in its current year to 30 September. 

Key examples from companies starting to report in 2024 therefore lend overall confidence in underlying market value. It might not be a rip-roaring start to the year but is a broadly resilient one.  

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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