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JD Sports Fashion HY: Much Further to Run

Published 02/10/2024, 08:09
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JD Sports (LON:JD) has reported some record numbers as the appeal of its multi-brand offering and its geographical diversification both continue to flourish.

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 half, revenues increased by 5.2% to £5.03 billion, largely in line with expectations, whereas adjusted pre-tax profit rose by 2% to £405.6 million, comfortably ahead of the estimated £384 million. The group also benefits from a broad channel offering and, despite a dip in sales of 1.4% as the pandemic shift continues to normalise, its online offering still accounts for 20.7% of revenues.

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. North American revenues already account for 35% of the group total, and once Hibbett is fully integrated, this is expected to rise to 40%, also raising the full estate by 1179 to 4506 stores, At the same time, organic sales rose by 10.7% in the half, even prior to the full benefit of the acquisition.

The group’s other fastest growing region is Europe, where organic growth of 10.1% in the period means that the region now accounts for 31% of total revenues. The UK is not far behind at 30%, and the combined efforts resulted in organic sales growth of 6.4% for the group, with effective cost control offsetting the continuing investment in growth.

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 (NYSE:NKE) (despite its own current difficulties) and Adidas (ETR:ADSGN) 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.

The outlook for the industry is also seemingly promising, with external estimates suggesting value growth of 6.6% annually between 2023 and 2028, which would equate to a total target market value of $544 billion in 2028 from $396 billion in 2023. Within this timeframe, JD Sports aims to have double-digit market share in its three key markets and its strategy thus far has shown that it is keen to provide this growth through acquisitions as well as organic growth. In the meantime, the group is maintaining its outlook of full-year adjusted pre-tax profit in a range between £955 million and £1.035 billion, with the current strength of sterling against the dollar and the euro providing some currency headwinds.

The group has also seen 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 48.2% in the latest half-year might represent a drop of 0.2% from the corresponding period, but adjusted operating margin rose by the same amount to 9%. Either way, this is 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.

As yet, the share price performance has not reflected the longer-term potential, with the shares some 35% lower than the previous peak of 233p which was achieved in November 2021. Over the last year, the price movement has been pedestrian, with a gain of just 1% comparing to a rise of 10.2% for the wider FTSE100. More promisingly, the shares have rallied by 26% over the last three months, which could yet prove to be something of an inflection point, although the initial price reaction to the update could contain an element of profit-taking given that surge. Even so, with the shares still looking extremely 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 is an indication that JD Sports has much further to run.

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