Investing.com -- JD Sports Fashion Plc (LON:JD) has revised its profit guidance for the full year, warning investors to expect earnings at the lower end of its previously forecast range of £955 million to £1,035 million, sending its shares tumbling by over 13%.
This downgrade follows softer trading in October, which saw like-for-like sales dip into negative territory for the group, with declines in key markets such as the UK, North America, and Asia-Pacific. European sales, however, showed a modest improvement.
The sportswear retailer mentioned that the trading environment became increasingly volatile during the quarter, with headwinds from elevated promotional activity, mild autumn weather, and a cautious consumer backdrop.
“We think that JD (NASDAQ:JD) Sports should maintain its position as a preferred partner of major sportswear brands like Nike (NYSE:NKE) and adidas, given its strong retailing skills, ability to appeal to more urban/cash customers and its opportunity to drive its apparel offer with its elevated stores,” said analysts at RBC Capital Markets in a note.
These factors particularly affected October’s performance, despite a robust start to the quarter driven by back-to-school sales.
Overall, LFL sales for the group fell by 0.3% in Q3, with the UK down 2.4%, North America off by 1.5%, and APAC sliding 3.8%. Europe, in contrast, posted a 3.5% increase. Organic sales growth for the period came in at 5.4%.
Barclays (LON:BARC) analysts noted that JD’s softer guidance comes despite an improvement in foreign exchange impacts. The retailer now expects FX to be a £15 million headwind to profit in the second half, an improvement from the previously projected £20 million.
Barclays forecasts JD’s profit before tax at £979 million, slightly below the Bloomberg consensus of £986 million, with the latter potentially facing a low single-digit downgrade following this update.
The company has said the weaker performance to subdued consumer demand and competitive pricing pressures.
JD managed to improve its gross margin by 0.3 percentage points during the period by maintaining "commercial discipline," but this was not enough to offset the broader challenges.
“We also think improvements are coming through in governance, which should reassure investors, however execution risk is probably higher than average given the company's pace of expansion,” RBC added.
The results also reflect the broader struggles facing the retail sector, particularly in the US, where unseasonably warm autumn weather has dampened sales for many.
Analysts at Barclays observed that trading conditions may improve as colder weather sets in, offering some hope for a stronger finish to the year during the peak holiday season.
The latest warning adds to concerns about the company’s ability to generate stronger free cash flow (FCF) in the coming years.
Barclays pointed out a stark contrast between JD’s FY25 price-to-earnings ratio of 8.6x and its price-to-cash flow ratio of approximately 17x, reflecting a free cash flow yield of just 6%.
Heavy capital expenditure, including new store openings and acquisitions, continues to weigh on cash generation, with capex expected to run at nearly three times depreciation in FY25.
JD Sports has expressed confidence in its positioning for the crucial holiday trading period but acknowledged that the overall environment remains highly unpredictable.
The cautious tone reflects broader industry challenges and underscores the importance of upcoming trading to meet even the revised profit targets.
Barclays analysts remain wary, maintaining an “underweight” rating on the stock and noting that the low-end profit threshold for JD’s long-term incentive plan (LTIP) of 2.5% growth is reflective of cautious capital allocation priorities.
“Given the company's lowered guidance, we would expect similar changes to adj. consensus estimates, with £955m implying a ~3% cut to Jan-25 PBT consensus,” said analysts at Morgan Stanley (NYSE:MS) in a note.