Strong second-quarter showing from JD Sports

This is an unquestionably strong second quarter showing from JD Sports Fashion (LSE:JD.), underpinned both by its multi-brand offering and the geographical diversification of its business.

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Such diversity allows for some parts of the business to pick up where others are faltering, as seen earlier in the year as UK sales dipped while the likes of Europe and North America blossomed. For the latest quarter, the situation has advanced given a material improvement in fortunes domestically, where organic sales growth of 1.2% reduced the first-half deficit to 1.8%. There were also notable contributions from both the European and Asia-Pacific regions, with organic growth of 10.5% for both in the latest quarter, leading to numbers for the half-year of a positive 10.1% and 10.5% respectively.

Perhaps the most exciting and obvious opportunity in the medium term is JD’s growing brand presence in the major US market. In the period, the group completed the £900 million acquisition of US retailer Hibbett, which should further propel brand awareness, especially in the southeastern corner of the country. At the same time, organic sales rose by 13.7% in the latest quarter and by 10.7% in the half, while like-for-like sales also showed encouraging growth of 5.7% and 3.3% respectively.

Of course, the group’s acquisition strategy does not come without risk, particularly at a time when there are questions over the resilience of the consumer on both sides of the pond, but to date JD’s track record has been impressive. The £450 million purchase of French retailer Courir last year adds extra pressure in its ambitious growth plans, but the company seems increasingly set fair to benefit from the additional global footprint. Given the group’s close association with major brands such as Nike Inc Class B (NYSE:NKE) and adidas AG (XETRA:ADS) and its aim to engage an emerging generation of customers through a combined culture offering of sport, music and fashion, the immediate future looks increasingly bright.

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The company retains a cautious outlook due to the uncertainties of the current economic environment and will take a small hit from the recent strength of sterling when its earnings are repatriated from overseas. Even so, JD is maintaining its full-year guidance for adjusted pre-tax profit to be in a range between £955 million and £1.035 billion, which should provide extra reassurance.

The group has also seen the headwind of a slight deterioration in its gross margin, previously impacted by the high levels of discounting which it found necessary to implement given the broader challenges. Nonetheless, the level of 48.4% in the latest quarter might represent a drop of 0.3% from the previous year, but is at a healthy level indeed given the group’s positioning towards the premium part of the market, especially in comparison to some of its peers in this unrelentingly competitive environment.

The ongoing expansion of both supply chains and its store presence is also reaping dividends. For the latter, the ongoing disposal of non-core stores was more than offset by the group’s opening of new sites as well as the Hibbett acquisition, which resulted in an additional 1,200 stores being added this year, taking the estate to just over 4,500, with the potential for more selective acquisitions should the opportunity arise.

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The share price has not yet mirrored the potential arising from the company’s growth, and the shares are down by 36% over the last three years. Over the last year, a previous profit warning and a poor trading update from key supplier Nike both contributed to a dip of 15% compared with a gain of 14% for the wider FTSE 100. However, a gain of 14% over the last six months could yet prove to be something of an inflection point, and the initial price reaction to the update seems to strengthen that case.

With the shares still looking cheap on a historical valuation basis, and with the group increasingly laying out plans to build on its growing global footprint, the market consensus of the shares as a buy reflects the growing optimism surrounding the company.