Two retail stocks bucking the trend

FTSE 250 retailers JD Sports Fashion and Card Factory are both in favour after annual results today.

At a time when retailers are closing stores or battening down the hatches, the expanding footprints of JD Sports Fashion (LSE:JD.) and Card Factory (LSE:CARD) make for interesting City viewing.

JD Sports Fashion has been a cracking growth story for some time, with the latest chapter very much focused on the U.S. after last year's acquisition of Finish Line's 900-plus stores and concessions gave it a foothold in the world's biggest sports footwear and clothing market.

American consumers don't warm to British retailers easily - just ask Marks & Spencer (LSE:MKS) or Tesco (LSE:TSCO) - but so far JD investors have been excited by the opportunities on offer after a 59% rally for the FTSE 250 stock in the year to date. This was reinforced by annual results today showing a 49% jump in revenues to £4.7 billion and 15% rise in underlying profits to £355.2 million.

That's quite an achievement for a company that only broke the £100 million profits barrier for the first time in the year to January 2015. It is a stock with momentum, which is why analysts at Peel Hunt today upped their price target by 30p to 580p a share. 

Card Factory, meanwhile, continues to add new outlets as part of its ongoing ambition for a "cost-effective estate" of 1,200 stores or more. Shop openings are its biggest growth channel, with a net 51 added in the past financial year to take the current portfolio to 972.

The vertically integrated company has its own in-house design team, printing facility and central warehousing capacity, which allows the Wakefield-based company to operate with significantly reduced costs compared with its rivals. 

The resulting boost to its operating margin makes the group highly cash generative and leaves it in a strong position to continue paying a special dividend, although the 5p in December was much smaller than the 15p a share for the previous year. It said today it expects to declare another special dividend at the time of the interim results, depending on trading conditions.

Card Factory stores saw broadly flat underlying sales in the year to January, with only 1% of the shops open for more than a year recording a loss. Group underlying earnings per share were down 12% to 17.6p following headwinds from foreign exchange and the national living wage.

As the company moves towards its 1,200 store target, Card Factory is looking to other avenues such as additional investment in online and in click & collect. It also has a trial scheme to sell its ranges in 112 Aldi stores.

While shares have experienced mixed fortunes this year, analysts at UBS believe they have the potential to reach 230p - a level last seen a year ago. They also anticipate a special dividend of 7.5p a share.

The dividend is less of an issue at JD Sports as it continues to focus resources on development opportunities. As well as Finish Line, this has included the smaller recent UK acquisitions of Footasylum and Pretty Green.

Underlying sales remain impressive in the current climate, with sports fashion fascias achieving like-for-like growth for the financial year of 6%, including double-digit gains in both Europe and Asia Pacific. The core Finish Line business also got off to a strong start, with growth of 7%. 

JD opened its first five American stores just before Christmas, including four converted Finish Line stores. It is encouraged by Finish Line's strength online and sees opportunities for it to improve the quality of its visual merchandising.

The group, which has the continued support of key brands such as Nike and Adidas, is planning a dual fascia approach in the United States.

Shares now trade at a price/earnings multiple close to 20x, having risen by more than 350% in the past four years. That's made JD a regular fixture in our interactive investor Winter Portfolios, which select the stocks that consistently generate significant gains between November 1 and April 30. They are up 35% so far this winter, having improved 29%, 46% and 9% in the previous three years.