JD Sports Fashion (LON:JD) has been one of the strongest performers in the FTSE 100 so far this year. It has long overtaken its troubled rival Sports Direct (LON:SPD) as the most highly valued sports-focused retailer. That’s partly because of its focus on so-called athleisure that millennials, in particular, are willing to pay a premium for, and due to its strong brand relationships.
With the shares up by over 100% in 2019, what’s next for the group and can the success continue?
What’s behind the rise JD Sports is one of a handful of retailers with a significant high street presence that are defying the retail doom and gloom. I think the fact the retailer has tapped into a high-growth, high-margin trend, the rise of athleisure, is a big part of the reason why investors are willing to keep pushing the share price higher.
Another factor will be the excitement behind the move into the US. This started in 2018 with the $558m acquisition of Finish Line. This gave it a foothold of 600 stores in the US.
Thirdly, a flurry of positive market updates has helped reassure investors about the group’s growth prospects. Most recently, in the 26 weeks to 3 August, pre-tax profit rose 6.6% to £129.9m on revenue of £2.7bn, up 47% on the same period a year ago.
During the half, the company added 23 new stores across mainland Europe and seven in the Asia Pacific region. In addition, it now has six JD Sports stores operating in the US, along with a trading website.
What are the risks
One of the most obvious and clear risks is that any bad news from JD means that the shares get hammered. Investors now are very used to upbeat statements and a lot of optimism is factored into the share price, I feel.
There’s also an ongoing investigation by the Competition and Markets Authority into the acquisition of Footasylum, this has now been escalated to a phase two investigation.
One of the other risks is that the large acquisition in the US, which so far seems to have been on track, fails to live up to expectations as time goes on. Large acquisitions are notoriously risky and UK firms expanding into the US have a record of failures.
That doesn’t mean that JD won’t be successful there, but investors will need to keep a close eye on progress in the US because the share price will be hit if the expected growth doesn’t materialise.
Can the success continue into 2020
Although the shares aren’t cheap on a P/E of around 27, given the quality of the management, international expansion and the continuing growth potential of the athleisure market, I believe JD Sports should continue to shine in 2020. For context, embattled Sports Direct (LON:SPD) has a P/E of 17, but given its problems with poor acquisitions and investments, as well as strained relations with some of the world’s largest sports brands, I see far less potential for it to grow like JD.
Andy Ross has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019