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NIKE confirmed Q4 was the quarter of maximum financial disruption as it implemented the Win Now reset and that headwinds should start to moderate and that trends should improve from its Q126. NIKE’s 1H26 will still be impacted by the reset but the rate of decline should improve through FY26. It is looking for a ‘cleaned up’ marketplace by the end of 1H, though will still be reducing Dunk franchise in 2H. NIKE’s Q1 guidance is for a mid-single digit fall in revenues vs the 12% decline seen in Q4 (-9% in Q3). NIKE Digital revenues are expected to be down double-digit for the whole FY26 as it repositions to full-price model and more premium offer. NIKE expects current tariff rates to be a $1 billion headwind (c75bps hit to FY26 gross margin with 100bps impact to 1Q gross margin). It intends to fully mitigate the costs over time by 1) reducing exposure to China (16% of footwear into US); 2) Partnering with suppliers / retail partners to mitigate these costs; 3) Price increases; and 4) Corporate cost reduction. Encouragingly for Wholesale partners like JD, NIKE commented that its order book for the holiday period was positive. For JD, its 1H is still going to be challenging, with more positivity from 3Q and over Christmas. So delivery of FY26 is going to be more 2H-weighted. It is still unclear when NIKE is going to have a full pipeline of innovation which is large enough in volume to offset the shrinking of its three classic franchises (AF1, Dunk, AJ1). This seems unlikely until JD’s FY27. Undemanding valuation (CY26E PE 6.1x) does not reflect recovery and longer-term growth opportunities. We have updated our forecasts for the FY25 results. No change to PBT with de minimus change to EPS.
JD Sports Fashion Plc
It felt like a positive update and there is a clear read-across: a stronger leader makes for a stronger industry. There were a number of nods to the importance of wholesale link-ups and specific shout outs to JD/Dicks as key partners. From a low PE, this should be taken well by JD.
JD Sports Fashion^ (JD., Buy at 82p) - A tough year for Nike, but above expectations
JD Sports Fashion^ (JD., Buy at 76p) - JD Sports Fashion^ (JD., Buy at 76p) - New flagship store showcases the best of ath-leisure
Speaker: Regis Schultz, CEO What we learned: . Product trends: there were broad discussions about the performance of different sports brands within JD stores. Management sees the division between lifestyle and sports performance as somewhat blurred, with the current trend for ''comfort walking'' noticeably bringing success for running silhouettes within JD stores. It sees low-profile as a fairly small part of the market. . Shelf-space: there were questions about the allocation of in-store shelf space among brands. JD''s buyers are organised by category, e.g. running and retro basketball, rather than by brand. Space allocation decisions are made by the stores rather than determined by head office based on negotiations with the brands. Management described the difference between the role of a retailer, to curate the best assortment and select hot products, and a distributor, which is less discerning about the products it takes from brand partners. It believes that brands value differentiated retailers more highly in the medium-term, even if it means their shelf-space may fluctuate. . Tariffs: as JD said on its recent earnings call (see here), it has not seen a direct impact from tariffs on the US consumer. It expects US industry prices to rise under the current tariff scenario (we think by c.4%). The reaction to tariff uncertainty has been orderly and rational in the industry, having learnt from previous dislocations like Covid. . Infrastructure investments: management has been investing in the group''s infrastructure, and believes it is two-thirds to three-quarters through this process. By the end of calendar 2026 the supply chain investment should be complete, with double-running costs fully rolling off by 2027, and provide capacity for 5+ years. It is confident that this can drive margins higher in Europe since supply chain costs are higher as a percentage of sales than in other markets. Management noted that group profits in recent years had...
JD Sports Fashion^ (JD., Buy at 85p) - Red, White & Bruised– but FCF strong
Unclear field ahead JD Sports'' shares fell sharply at yesterday''s full year results, despite delivering profits in line with expectations and confirming that it is comfortable with year-ahead consensus. Weak US trends during Q1 overshadowed more positive results in UK and Europe. We continue to expect like for like sales to decline this year, keeping us watching from the sidelines. We lower our FY Feb-26 adjusted PBT forecast to reflect the weaker US dollar. Neutral. Q1 sales: in line with expectations, but weaker in the US Q1 like for like sales (13 weeks to 3 May) were -2.0%, in line with consensus and management expectations. Performance by region was mixed, with North American -5.5%, Europe +0.7%, Asia Pacific -5.5% and UK +0.4%. Management has not yet seen any direct impact on the US consumer from US tariffs, but said that Shoe Palace faced challenges from US immigration policy changes, as it targets a Hispanic consumer. LFLs were +2% at the JD US banner but -17% at Finish Line. FY Feb 26: comfortable with consensus Management said that it was comfortable with consensus FY Feb-26 adjusted PBT of GBP 890m, which has fallen from GBP 920m since April, albeit it is not providing guidance due to tariff uncertainty. We cut our forecast to GBP 871m from GBP 916m, largely due to currency. Forecasts cut, maintain Neutral On our new forecasts JD Sports trades on CY25 P/E of 7.2x. Although a low multiple, the outlook is fairly challenging, with uncertainty about the strength of the US market and the momentum of its largest brand partner. Our DCF-derived TP remains at GBp 95, with stronger year end net cash offsetting the currency-driven cuts to our forecasts.
FY results call summary The main points on the JD Sports FY earnings call included changes to the competitive landscape, the product pipeline and the US consumer. We expect the mid-point of FY-Feb 26 Adj. PBT consensus estimates to remain broadly unchanged at GBP 890m, as management said it was comfortable with this figure, which has fallen in recent weeks. This guidance still excludes the direct and indirect impact of tariffs, which management said remain unclear at this stage. Where do the shares go from here? JD Sports shares are -10% as we write (GBp 84). We think this reflects the ongoing challenges in the North American market, highlighted by the weak Q1 like for like sales. Management said that it is comfortable with the new mid-point of FY Feb-26 Adj. PBT consensus, which is c.3% lower than when it last reported in April. We rate JD Sports Neutral. Next news JD Sports is scheduled to report a Q2 trading update in August. Results recap JD SPORTS: FY results first take: in line trading, no FY26 guide Key takeaways from the call . Current trading: management is pleased that the UK market has picked up more recently, with Q1 (13 weeks to 3 May, representing c.15% of full year) LFL sales growth of +0.4%. European sales growth has also been positive, although high costs and less sports fashion appetite in Germany have been hurdles, while trading in the US has been more challenging. It notes soft store traffic across its markets and ''very challenging'' market conditions. . FY Feb-26 guidance: management is comfortable with the mid-point of FY Feb-26 adj. PBT consensus at GBP 890m. This is c.3% lower than when the company last reported in April, when the mid-point was GBP 920m. Profitability is expected to be more second-half weighted than previous years, reflecting minimal contribution in H1 from Hibbett and Courir net of higher financial charges. Second-half profits should be supported by higher contribution from these...
FY25 results contain no surprises JD Sports has reported a 4% decline in adjusted FY25 PBT to £923m (INVe £915.6m), in-line with its guidance range £915m-£935m. The total proposed dividend is up 11.1% to 1.00p. The weak performance reflected ongoing challenging market conditions in both the UK (31% of FY25 Group EBIT) & US (45% of FY25E Group EBIT) and heavy discounting/lack of innovation from NIKE (N/R), which has impacted the growth of the overall athleisure market. By region, UK EBIT fell 24%, with US up 18% and Europe up 22% FY26 guidance on a pre tariff/FX basis unchanged. Q126 trading - US weakness will catch eye Q1 trading remains subdued. UK, US and Europe LFL sales up 0.4% (Q4 -1.2%), -5.5% (Q4 -1.5%) and +0.7% (Q4 +3.5%) respectively. The US weakness will catch the eye, but JD has not joined in market discounting so the profit impact is less. There have been some delays in NIKE launches into Q2, according to management. Management guidance is unchanged and they had guided for FY26 adjusted PBT to be in-line with company-compiled consensus then of £920m (current consensus £890m; INVe £913.8m). This implies another year of no growth despite the benefit of acquisitions. Group revenues are expected to grow, helped by the Hibbett & Courir acquisitions (adding c.10% to sales YoY), 4% new space contribution and negative LFLs. Management plans to add c.150 new stores and c.100 conversions + relocations in the year, with c.50 closures, mainly in Eastern Europe. Difficult to see the shares performing short term, but long-term growth opportunities are overlooked The shares are up 24%/down 3% over 1mth/YTD respectively, responding more positively to the strategy update when a share buyback was announced, lower capex as a % of sales over time, and focus on optimising returns from the existing business. Valuation (CY26E PE c.7.2x) still suggests a short-term credibility issue. We believe JD’s leading global market position and attractive long-term US and European growth opportunities are being overlooked. However, it is difficult to see JD Sports’ profits recovering near term. NIKE’s reset plans are likely to impact the industry for the remainder of FY26. President Trump’s proposed tariffs may not help NIKE’s reset from a US perspective either.
JD Sports Fashion^ (JD., Buy at 93p) - FY25 Results - Delivering on guidance
1Q’26 sales growth of -2.0% LfL worsened from recent trends but is in line with internal expectations and the full year 2026E guidance for negative LfL growth. New space contributed +5.1%, resulting in total organic growth of +3.1%. FY’25 results are in line with expectations. No comment has been made on the FY’26E guidance, which previously indicated adjusted PBT would be in line with consensus (£903m currently, down from £920m in April), implying a ~2% YoY decline. While the shares have rallied recently, they remain down -3% YTD and continue to trade on undemanding multiples—4.2x 12m forward EV/EBITDA and 7.6x P/E—while delivering a high-single digit FCF yield. The recently announced proposed acquisition of Foot Locker at ~18x P/E highlights the relative undervaluation of JD Sports, which generates six times the PBT but has a market cap only 2.6x higher than Foot Locker’s purchase price. The updated medium-term strategy to leverage the substantial operational and capex investments made over the past two years appears prudent, and consensus expectations now look more realistic. The tariff impact, though manageable, keeps us on HOLD but long-term investors should be considering investing at this level.
In our view, JD is an exceptional business that has made the odd mistake and been hammered by external factors. We believe the current multiple is far too low for a market leader with growth prospects and cash on the balance sheet. We reiterate our Buy recommendation and 200p TP.
FY results: what happened? Today JD Sports reported FY Feb-25 Group Adj. PBT of GBP 923m within its guidance range of GBP 915-935m and slightly ahead of company-compiled consensus of GBP 919m. Trading in Q1 is in line with company and consensus expectations, reporting organic sales growth +3.1% and LFL -2.0% (including -5.5% in US and +0.4% in UK). Management did not comment on FY Feb-26 guidance but notes that ''The market remains volatile and visibility on the overall potential impact from tariffs is low''. BNPP Exane View: FY25 and Q1 in line, no update on FY26 guide Today''s new news is that Q1 trading is in line with both company and consensus expectations. What''s disappointing is that today management did not comment on the FY Feb-26 adj. PBT guidance. In April it expected FY Feb-26 Group Adj. PBT to be within the consensus range of GBP 878-982m and that this excludes any impact from changes to tariffs. In respect of tariffs management said: ''We are taking action to mitigate any potential impact through further diversifying the range of countries from which we source own brand and licensed products, continuing to work closely with our brand partners and ongoing cost control''. Likely direction of consensus Management has not explicitly provided FY Feb-26 guidance. In April it expected FY Feb-26 Adj. PBT to be in line with the consensus range of GBP 878-982m, and GBP 920m at the midpoint, and that this excludes any impact from changes to tariffs. Company-compiled consensus has already fallen to GBP 890m since April. Given the in-line FY25 results and Q1 trading, we expect FY Jan-26 consensus to remain broadly unchanged. Anticipated market reaction JD Sports shares are -3% year-to-date (versus FTSE 350 Retail Index +17%). The bulls will likely point to the in line FY25 and Q1 trading; the bears will likely point to no commentary on FY Feb-26 guidance. JD Sports shares have recovered since its FY trading update in April so today we expect the...
Agreed Foot Locker acquisition by DICK’s means newco will overtake JD as the largest global athleisure player Yesterday’s news that DICK’s Sporting Goods (NYSE:DKS, N/R) is acquiring Foot Locker (NYSE:FL, N/R) for $2.4bn means, that, once completed, JD Sports will no longer be the No.1 athleisure player globally (see Figure 1 overleaf). DICK’s has said that both companies will continue to be run separately and pursue their existing strategies, though $100m-£125m of synergies have been identified. Both businesses are complementary in offering different customer propositions and serving different markets in the US. Foot Locker also has an international operation. DICK’s management confirmed that it intends to keep the US focus of the DICK’s brand as it has a material growth opportunity to go after domestically. DICK’s has struck the deal at a time when Foot Locker’s share price has been trading at a c.15-year low, and logically is looking through the short-term geopolitical/macro concerns weighing on Foot Locker’s share price. DICK’S is coming from a position of strength with good business momentum and a strong balance sheet. Foot Locker is an iconic brand and an early-stage recovery story, in our view. Recovery momentum is starting to build and a lot of the difficult restructuring (e.g. store closures) has already happened, which de-risks the deal to a degree. Also, with Foot Locker more exposed to NIKE by sales participation, it has been disproportionately impacted by NIKE’s issues of late. However, with NIKE’s recent refocus back on wholesale under new CEO, Elliot Hill, this is positive for Foot Locker and all wholesale partners. US market may become more rational over the longer term From JD Sports’ perspective, short term, the newco will be a far more formidable US competitor and also, given its larger combined scale, in a stronger position with global brands at the negotiating table. The newco, in our view, will be a more focused business around two scaled brands whereas JD Sports’ US business comprises five brands. However, longer term, the ongoing consolidation of the US athleisure market could well end up being a positive as it may become a more rational market in the long term with less promotional activity. This would ultimately be positive for all. JD’s next news: FY25 results on 21st May. This is expected to be a non-event as JD held a comprehensive update on the Group’s strategic progress just over a month ago (9th April). It is difficult to see JD Sports’ profits recovering in the near term. The industry backdrop remains challenging not only from a macro perspective, but NIKE’s reset plans are likely to weigh on JD’s performance over the remainder of FY26 at least. Also, President Trump’s proposed tariffs may not help NIKE’s reset from a US perspective either. JD’s valuation (CY26E PE c.7x) still implies a credibility issue, but we believe investors are overlooking the strength of JD’s global market position and its attractive long-term growth opportunities.
JD Sports has a clear US growth plan and we believe its arrival there is among the reasons Foot Locker has struggled. New ownership may not change that for a while: potential medium-term merger complications offer JD Sports further market share opportunities. We reiterate Buy, TP 200p.
No surprises expected from FY25 results Having held a comprehensive update on the Group’s strategic progress just over a month ago (9th April), which included a trading update, these results are likely to be a relative non-event. Management confirmed FY25 adjusted PBT will be in-line with guidance of £915m-£935m. We forecast a 5% decline YoY to £915.6m with the disappointing results reflecting ongoing challenging market conditions in both the UK (30% of FY25E Group EBIT) & US (42% of FY25E Group EBIT) and heavy discounting/lack of innovation from NIKE, which has impacted the growth of the overall athleisure market. Expect to reiterate FY26 PBT guidance on a pre-proposed tariff basis Pre proposed tariff changes, management guided for FY26 adjusted PBT to be in-line with company-compiled consensus then of £920m (INVe £913.8m), which implies another year of no growth despite the benefit of acquisitions. Total revenues are expected to grow, helped by the annualization of the Hibbett & Courir acquisitions (adding c.10% to sales YoY), 4% new space contribution and negative LFLs. Plans are for c.150 new stores and c.100 conversions + relocations in the year, with c.50 closures, mainly in Eastern Europe. Market set to remain challenging near-term but shares offer material value over the long-term The share responded positively to the update (+24% over last month) on the group’s medium-term plans. Reflecting the expectation of slower ongoing market growth, management announced they would focus more on improving performance in the existing business, integrating the Hibbett & Courir acquisitions, lower capex plans (trending from 5% to 3-3.5% of sales) and implement a £100m share buyback programme. The group also announced the deferral of the Genesis buyout out to 2029/2030. It is difficult to see JD Sports’ profits recovering near term. The industry backdrop remains challenging not only from a macro perspective, but JD’s performance is also likely to be impacted over the remainder of FY26, at least, by NIKE’s reset plans. Trump’s proposed tariffs may not help NIKE’s reset from a US perspective either. JD’s valuation (CY26E PE c.7x) still implies a credibility issue. However, we believe investors are overlooking the strength of JD’s global market position and an element of medium-term recovery potential as well as attractive long-term growth opportunities in the US and Europe in particular.
JD Sports Fashion^ (JD., Buy at 79p) - FCF yield appeals
The main focus of this note is the meeting, which provided further detail on the strategy, but the fundamental strength of the JD franchise is the key factor here. Markets wax and wane but good companies come out of downturns stronger and we do not doubt JD will also do so. Reiterate Buy, TP 200p.
Q4 Trading Update call summary JD Sports provided a recap of the strategy from its CMD in February 2023 and the progress that it has made over the past two years. It then provided an update to its strategy for the medium-term. Other key topics on the call were FY26 Adj. PBT guidance, cost efficiencies and pricing. Understandably management did not provide any colour on the evolving tariff situation but noted that it is in communication with its brand partners. Where do the shares go from here? JD Sports shares are +10% as we write (GBp 69). We think this is fair given that the shares have performed poorly into the print and are -27% YTD. Next news JD Sports will report its FY Results on 21 May. Results recap JD SPORTS: Q4 trading update first take: in line with FY26 guide without tariffs Key takeaways from the call . Tariffs: given the evolving situation management did not provide any colour on the potential impact from tariffs. It noted that it is in communication with its brand partners, which are directly exposed to tariffs. It confirmed that its, and the industry''s, exposure to China is ''minimal'', and that most of what is produced in China is for China. . Continental Europe: it opened the Heerlen warehouse 18 months ago but this has been operating on a manual basis. It plans to start using automation in the summer, ahead of peak trading, which should increase capacity and allow it to close the other temporary warehouses and thereby reduce the double running costs. It expects the full benefit of Heerlen to be realised in FY27. . North America: it has seen strong gains in brand awareness in major cities like New York and Dallas. It is comfortable with its marketing strategy, which is focused on communities. It has seen good success in own brand and license apparel products. However, JD''s strategy is to react to consumer demand so it is not planning on building a significant own brand business. . Product/Brands: Adidas,...
JD Sports Fashion^ (JD., Buy at 68p) - Tariff turbulence
Trading has been “in line” throughout Q4 and into the new financial year. As such, FY26E PBT is expected to be “in line” with current consensus expectations, prior to any potential impact from tariffs. On this front, management remains in regular dialogue with brand partners. Looking ahead, the medium-term strategy has shifted to focus on growth, profitability, and enhanced shareholder returns. A new £100 million share buyback programme has therefore been implemented and capital expenditure is expected to trend lower. While the valuation remains undemanding, significant risks revolve around the US business and we require more evidence of stabilised trading within the core UK business.
We don’t change numbers today. While shorter-term PBT forecasts are not set in stone given the geopolitical risk, assumptions are not heroic. We believe the shares offer excellent value, and the cash return aspect opens up the story to new investor groups. The potential upside remains immense, in our view. We maintain our 200p TP and Buy rating.
Q4 Trading Update: what happened? Today JD Sports'' reiterates its FY Feb-25 Group Adj. PBT of GBP915-935m, as well as providing regional and segmental detail of its Q4 sales. Regionally, the US and UK weak like-for-likes largely offset the positive growth in Europe and Asia Pacific. Management also provided FY Feb-26 Group Adj. PBT guidance of GBP878-982m, which is based on the range of consensus estimates and GBP920m at the midpoint. JD also released its medium-term plan update, and it now expects global sports fashion to grow at a slower rate over the medium term. BNPP Exane View: in line FY25 and FY26 guide, intended GBP100m share buyback In January, JD Sports lowered its FY Feb-25 Group adj. Profit guidance and offered a ''cautious view of the new financial year''. Today, it reconfirms its FY25 guide and expects FY26 Adj. PBT to be in line with consensus expectations. However, the FY26 guide excludes any potential impacts from changes to tariffs. It says: ''We expect the trading environment in our key markets to be volatile throughout the year and we have started the year in line with our expectations''. It has also announced an intended share buyback programme of GBP100m. Likely direction of consensus Management reiterates its FY Feb-25 Group Adj. PBT of GBP915-935m guidance and expects FY Jan-26 Adj. PBT to be in line with consensus range of GBP878-982m, and GBP 920m at the midpoint. This guidance excludes any potential impact from changes to tariffs. It says: ''At this stage, the outcome of these developments is uncertain. We are in regular dialogue with our brand partners, but it is too early to comment on the potential sector impact.'' Anticipated market reaction At yesterday''s close, JD Sports shares are -34% YTD (versus FTSE 350 Retail Index -4%). As we write, the shares are +8% (GBp68). The bulls will point to the current trading in line with expectations, FY26 Adj. PBT guidance in line with consensus expectations, and a GBP100m share...
JD Sports Fashion^ (JD., Buy at 74p) - Nike, et al, bite again - downgrades
In our view, JD will come out of these difficult industry times in a stronger position. It remains the big brands’ partner of choice and continues to innovate both in-store and online. While these big industry issues cannot help but weigh on short-term forecast momentum, we believe the long-term outlook is rosy. We reiterate Buy, TP 200p.
Headwinds from reset expected to be worse in Q4 than Q3 as previously guided. Headwinds to continue in 1H26 NIKE (N/R) Q3 (3 mths to end Feb) beat consensus sales & earning expectations, though revenues were down 9% (down 7% CC) to $11.3bn (FactSet consensus $11bn) and EPS down 32% to 54c (consensus 30c). Direct revenue declined 12% (-10%CC), while Wholesale revenue fell 7% (-4%CC). North America revenues fell 4%, a sequential improvement on 2Q -8%, with NIKE Direct revenues down 10% and Wholesale revenues up 3%, due to favourable shipping timing and increased shipments to its value partners in 3Q. EMEA Q3 revenues fell 10% (-6%CC) with NIKE Direct down 12% & Wholesale down 3%. Q4 guidance very much in keeping with the views given at the end of 1H. Namely, Q4 performance will be impacted more than Q3 from the reset and ongoing clearance. NIKE Q4 revenues guided to be down in the mid-teens range, albeit at the low end, and includes several points of unfavourable shipment timing in North America and 2 points negative FX impact. Management has been clear headwinds will continue into 1H26 but should start to moderate from Q4. It confirmed the sort out of stock levels in Wholesale will run through its 1H ie to the end of CY25. With NIKE Direct, action has already started with the buy tightened from the end of last summer and going forward, surplus inventory will be pushed through the factory shops. More positive longer term ‘mood music’ for Wholesale partners like JD with a more integrated approach from NIKE Management said its 5 ‘Win Now’ actions were creating a better balance in the business and reigniting brand momentum after the first 90 days. NIKE continues to accelerate its product portfolio transition, leading with Sports Performance and right-sizing down its classic footwear franchises, with total units planned to be down double-digit in FY26. The most aggressive right-sizing action is on Dunk. The cleaning up of the marketplace will continue through Nike’s 1H26 (ie end of 2025) according to management. NIKE Digital’s buy is being tightening to support a full-price business model. For NIKE factory stores, markdowns will be increased to drive velocity of higher volumes of clearance inventory. In Wholesale, NIKE is taking some pain by investing in sales-related returns, reducing forward supply and providing higher wholesale discounts to liquidate aged inventory. More relevant to JD Sports and other Wholesale partners is the collaborative language NIKE is using and the emphasis that NIKE Direct and Wholesale channels have to be managed in an integrated approach. NIKE talked about ‘building growth plans together, creating distinct consumer positions and consumer right assortments, engaging way earlier in the process asking for product feedback, delivering our assortments at the right time, right place and at the right depth’. NIKE is investing in product engagement and commercial terms plus rebuilding the scale and capabilities of its sales organisation. Continued overleaf
A reality check on 2025 for JD Sports After its disappointing Christmas, and after re-evaluating the sector and JD''s prospects as we return from our Retail Tour, we conclude that the road to recovery will be long for JD. Nike, which accounts for around half of JD''s sales, is still in the process of cleaning-up its lifestyle franchises, so we expect a prolonged period of wholesale discounting with no guarantee of a turnaround even in the Fall/Winter season. As a result, we now forecast another year of declining profits for JD, making it difficult to justify a positive outlook, despite its single-digit P/E. We downgrade to Neutral. What went wrong? After our Retail Tour a year ago we concluded that the risk-reward at JD (117p at the time) was attractive, despite poor visibility. Until October it grew LFL sales, per our thesis in Comeback king. Since then, however, the weight of discounted lifestyle products, by Nike and some of its other wholesale partners, has forced JD into a difficult choice: sacrifice margin or lose market share. Apparel trends also seem to have worked against JD, prompting us to revisit the debate about Shein. A downward revision to our estimates We cut our Adj. PBT forecast for Feb-25 from GBP 955m to GBP 917m, which is roughly the midpoint of management''s guidance. We expect the company to provide Feb-26 profit guidance in late March. We cut our Feb-26 profit estimate from GBP 1,070m to 916m, assuming LFLs of -1.5% Into the long grass, downgrade to Neutral We anticipate a particularly challenging first half for JD Sports, as the wholesale channel remains promotional while Nike clears inventory. Although the shares already reflect this expectation, the risk is that a meaningful recovery may not materialise until 2026, making it difficult for the shares to outperform. We cut our DCF-driven target to GBp 95 and downgrade to Neutral.
JD Sports Fashion^ (JD., Buy at 90p) - The other shoe dropped
JD Sports has seen another period of weak trading in Nov-Dec’24 with LfL sales down -1.5% reflecting weakness in the UK and North America. While the Group maintained its gross margin discipline in a highly promotional market, the weak LfL growth has led to another cut to adj. PBT guidance to a range of £915-935m (previously lower end of £955-1035m), which at its mid-point implies FY’25E profits now fall -3.8% yoy. When excluding the acquisitions made this year, underlying profits are falling -6.5% yoy. The group is “taking a cautious view of the new financial year”, leading us to cut FY’26E PBT estimates by -10%. Shares declined -42% in 2024 and appear cheap trading at only 6.5x 12m forward PE multiple and 4.0x EV/EBITDA multiple but continued weak trading and guidance cuts will only put further downward pressure for now – hence we remain HOLD.
Performance below guidance with consensus FY25 PBT downgrade of c4% expected Due to a challenging market environment where JD Sports decided not to join in promotional activity, management is now guiding for FY25 PBT and adjusting items to be between £915m and £935m, versus November’s guidance to be at the lower end of a £955m-£1,035m range (Visible Alpha consensus £963.6m; INVe £961.6) FY LFL sales are now expected to be flat (previously 1%) and gross margin flat. Guidance now includes £7m additional profit from the Courir acquisition, which was not in previous guidance, at the end of November. However, this is fully offset by an extra £6m acquisition related cost under IFRS16 for Hibbett and £2m higher FX than the £15m hit previously guided to. Looking into FY26, consumer spending/confidence does appear to have weakened in most markets. The NIKE reset will take time with newer product not likely to come through in volume, we believe, until the 2H of JD’s financial year. Therefore, we expect the consensus downgrade to be greater in FY26 than FY25 (FY26 consensus PBT £1,088m vs INVe £1,139m). Weakness seen across all key markets After a weak October (last month of Q3), Group organic sales were up 3.4% versus Q3 sales +5.4% (LFL -0.3%), with a stronger performance in December. LFL revenue across November/December was down -1.5%, in a challenging volatile, promotional market. December LFL revenue grew 1.5%, with LFLs +20% over the two peak weeks of Black Friday and the week before Christmas. Footwear sales grew and outperformed apparel, with stores outperforming the online channel. By region, LFLs were negative in the UK and US, with positive growth delivered in Europe and Asia. Gross margin is ahead of LY with FY gross margin expected to be in-line with FY24. The business exited the period with relatively clean stock which will be cleared by the end of the sale. Forecasts/TP placed under review JD’s shares are down 26%/16% over 3 months/12 months, The valuation (CY25E PE of 6.8x ex Courir) implies there is a credibility issue, and the market is likely to remain sceptical of short term expectations and to overlook the Group’s attractive long term growth opportunities, in our view. Evidence of better trading and market stability is probably needed before the material valuation gap is closed.
Q4 sales: what happened? JD Sports'' Q4 sales missed expectations due to weak markets in UK/US. Group LFL sales in the 9 weeks across November-December were -1.5% albeit these were +1.5% during December. Regionally, the UK and North America remained the more challenging markets. It chose not to participate in promotions, protecting gross margins which increased year-on-year. Management guides full year Feb-25 Group Adj. PBT to GBP 915-935m compared with previous guidance of around GBP 955m, implying a c.4% consensus downgrade at the mid-point of the range. BNPP Exane View: tough environment unsurprising, but disappointing, and focus on FY Feb-26 In late-November management had said that its full year guidance was based on Q4 LFLs of +2% and today reports -1.5%, with presumably far less of a positive upswing in December than it had banked on. We forecast +1.9% and there was only a thin Visible Alpha consensus. JD kept discipline in a promotional environment to protect gross margins, as it had in Q3. Even if the market was anticipating some consensus profit drift, particularly after Nike''s results, the extent of the sales miss and a ''cautious view of the new financial year'' is likely to send the shares down sharply today. Likely direction of consensus FY Feb-25 Group Adj. PBT consensus sits at GBP 964m, per Visible Alpha, so the new range GBP 915-935m implies a consensus cut of 4% at the mid-point. Note this new range includes Courir profits of GBP 7m but also a GBP 2m drag from currency and GBP 6m further IFRS-16 related accounting costs from Hibbett. Focus will also be on potential cuts to FY Feb-26 Adj. PBT, where consensus currently sits at GBP 1,088m. We think consensus may fall below GBP 1bn. Anticipated market reaction JD Sports shares were -42% in 2024 (versus FTSE 350 Retail Index -6%) albeit have performed solidly in January. There''s not much for the bulls other than a better exit rate, whereas bears will point to continued...
JD Sports Fashion^ (JD., Buy at 97p) - FY25F Trading - Another guidance cut following slower sales
Assuming that other brands can continue to make up for a recovering Nike may be optimistic, so we switch our +2% LFL target to -2% for next year. It’s a small miss to FY25E (4%) but a major downgrade to FY26E (13%). We believe the long-term strategy is correct, and JD will continue to lead the market, but we must rein in short-term hopes and bring the TP back from 250p to 200p. We retain our Buy recommendation.
JD Sports Fashion^ (JD., Buy at 97p) - Christmas trading preview
Nike 2Q better than expected, though discounting to reduce inventory continues as it pushes on with business reset For the 3 months to Nov 30th, Nike reported revenues down 8% (consensus 10%) or down 9% at constant FX. Note Cyber Week shifted into Q3. Earnings were 78c (FactSet consensus 63c). NIKE Direct was down 14%CC (Digital down 21%/stores down 2%) with Wholesale down 4%. Gross margin (down 100 bps) impacted by higher markdown on NIKE Direct, wholesale discounts to liquidate inventory and channel mix headwinds, partially offset by lower product costs and strategic pricing actions. Traffic and retail sales were below expectations in September and October, with momentum building in November. In North America, Black Friday Week was NIKE’s largest demand week ever on Nike Digital, with sales up double-digits, but its offprice mix was up high single-digits versus the prior year. In North America, Q2 revenue was down 8%. NIKE Direct declined 15% (Digital down 22%/Stores down 3%) with Wholesale down 1%. In EMEA, Q2 revenue declined 10% with NIKE Direct down 20% (Digital down 32%/Stores up 3%) with Wholesale down 4%. EMEA is the first region where NIKE Digital was repositioned as a premium platform, resulting in better full-price realisation and a strong double-digit decline in off-price sales. Inventory levels remain higher than management would like, with elevated supplies in North America and China offset by declines in EMEA & APLA. Partner-owned inventory was down YoY. Having pulled FY guidance in October, management stuck with quarterly guidance. Q3 revenue guidance is to be down low double-digit. Q4 headwinds from strategic change will be greater than Q3, with plans to accelerate inventory liquidation actions in 2H. Supply will continue to be reduced in classic franchises, so the summer order book is expected to be down. Positive mood music for wholesale partners like JD from NIKE’s new CEO New CEO, Elliot Hill, said his priority was to clear stock, reignite the range by leading with sport, and put the athlete back at the heart. The good news for Wholesale partners like JD Sports is that he emphasised the focus is on getting back to a healthy marketplace and a full-price business for partners and NIKE Direct. He is looking to elevate the entire marketplace and create a foundation for growth. He talked about how the previous management’s focus on prioritising digital had impacted the health of the marketplace. He also talked about returning to a pull marketplace for its largest classic franchises and to become less promotional (NIKE Direct started the year at just 50% full price). This will take time. Continued overleaf
Foot Locker reported similar trends to JD over August/September/October. Cut FY guidance Foot Locker (NYSE:FL, N/R) reported disappointing Q3 results (3 months to 2 Nov) yesterday, with top- and bottom-line performances missing expectations. It reported similar US trends to those described by JD Sports at its Q3 update on 21st November. Foot Locker’s sales softened post August’s peak Back-to-School period, from positive high single-digit to negative low single-digit in September/October; JD’s North America Q3 LFLs were down 1.5%, having been up 5.7% in Q2. Footwear comps were up high single-digit with apparel comps down in the low 20% levels, impacted by continued weak innovation and European promotional activity. The promotional environment was more elevated than anticipated in DTC and competitors, so the 230bps improvement in Foot Locker’s gross margin was less than expected. Q3’s North America comps were up 2.1% (Foot Locker North America comps +1.6%) with its Champs Sports banner returning to positive comp sales growth, up 2.8%. In Q4 to date, Foot Locker’s early November sales were weak but there was a meaningful pickup over the key Thanksgiving/Black Friday period. Foot Locker’s FY guidance was cut as a more cautious view was taken on consumer demand and the promotional environment. Guidance is now for FY comp sales +1% to +1.5% (prev +1%-3%) with Q4 +1.5% to +3.5% (Q3 comps +2.4%). Gross margin FY guidance is 28.7% to 28.8% (prev 29.5% to 29.7%), up from FY24’s 27.8%. Foot Locker’s management commented that Elliot Hill, new CEO of NIKE, is taking the right actions for the brand and overall marketplace. Foot Locker expects to return to growth on an allocation basis with Nike in Q4, having been impacted in FY24 when NIKE cut its allocation. In Q3, sales of brands such as adidas, New Balance, On, HOKA, UGG and ASICS were up strong double-digits, driven by door expansions and LFL. NIKE’s product mix & inventory rebalancing has been a drag. Another material downgrade is already being discounted in JD’s valuation (CY25 PE 7.2x ex Courir) JD’s FY guidance (i.e. PBT coming in towards the bottom end of £955m-£1,035m range) is based on a Group LFL sales acceleration from 0.5% YTD to c1% for the FY. Foot Locker’s comments about a meaningful pick up over Thanksgiving is encouraging for the US as this is after the period JD reported for. Also, like JD, Foot Locker highlighted a ‘favorable launch calendar relative to both the third quarter and last year's fourth quarter.’ JD is up against easier comps in Q4, and we believe the risk/reward is skewed to the upside with the longer-term growth opportunities being overlooked by its current valuation.
JD Sports Fashion^ (JD., Buy at 102p) - Time to get a foot in the door?
JD has completed on the acquisition of Courir in Europe JD has finally completed on the acquisition of Courir (announced in May 2023) following conditional clearance from the European Commission on 22 October. Courir has 323 stores branded as Courir across France, Spain, Belgium, the Netherlands, Portugal & Luxembourg. In addition, there are 36 stores which trade under franchise agreements as Courir in North West Africa, Middle East and French overseas territories plus 3 owned stores trading as Naked, an elevated concept for women’s sneakers. To satisfy the remedies, 21 Courir stores (15 in France and all 6 stores in Portugal) will be divested to Snipes in Q1 FY26. The acquisition cost is €520m and we have previously estimated that it will add a couple of percent to PBT post financing on an annualised basis, though we note there is no comment on the recent performance of the business. In the US, DICK’S reported much better Q3 trading than JD In other news, DICK’S Sporting Goods (NYSE: DKS) yesterday reported Q3 results for the same period as JD reported last week. DICK’S seems to have navigated the promotional environment well, benefiting from a much broader, differentiated product assortment (covering sports, outdoor and equipment) than JD. DICK’S raised guidance for the third time this year, after reporting Q3 earnings to end of October of $2.75 (FactSet consensus $2.69). DICK’S Q3 sales were up 4.9% with comparable sales adjusted for the calendar effect up 4.2% (Q2 +4.5%) and the gross margin expanded by 67bps, driven by higher merchandising margin due to sales mix more than offsetting the calendar effect and deleverage on occupancy costs. This performance contrasted with that of JD Sport, which saw weakness in Q3 sales, reporting Q3 US LFL sales down 1.5% (Q2 +5.7%). Like JD, DICK’S talked of a strong back-to-school period but felt the weather and election had no impact. On weather, management commented: ‘It was warmer than we might have liked in the last part of the quarter, but it didn't have a material impact on our comp.’ and when asked about the Election pull-back, said ‘we didn't see anything meaningful…in the quarter. We are seeing the consumer just fine after that.’ To get another view of the US market, the focus now turns to Foot Locker (NYSE: FL) which reports its Q3 update on 4 December, and operates in a more similar segment of the market to JD Sports.
JD Sports Fashion^ (JD., Buy at 100p) - Courir acquisition to add 338 stores in Europe
We have adjusted our estimates following JD''s trading update last week and its revised profit guidance. Our FY 24/25 forecasts fall c.3% in line with this guidance change and our target price falls to reflect this. We do not consider the changes to be material; our rating is unchanged.
Q3 sales call summary Management commented on the ''mixed'' performance over the period, with a strong back-to-school followed swiftly by a softer October. Trading was volatile with a consumer that is increasingly event-driven. Key discussion points on the call included the softer October trading, the promotional environment, and the banner dynamics. Management remains confident that it can deliver +2% LFLs over Q4, on a soft comp base of -1.6%, to meet the lower end of its guided FY Feb-25 Adj. PBT range of GBP 955-1,035m. Where do the shares go from here? We had thought that the market was braced for news of softer trading in October. Clearly this wasn''t the case with JD shares -14% as we write (97p), a fairly brutal response to a full year c.3% consensus profit downgrade. Delivering peak trading of c.+2% LFL is key, and comments by Nike at its Q2 earnings in December will also be important. Next news JD Sports is scheduled to report a Q4 Trading statement on 14 January 2025. Results recap JD SPORTS Q3 sales first take: at the lower end Key takeaways from the call . October trading: A strong back-to-school in September was followed by what management referred to as a ''much softer'' October due to the US election, warmer weather, and lower consumer confidence. Third party data suggests that the US general merchandise market swung high single digit negative in the 2 weeks before the election, and warm weather led to a +50% increase in the sales of t-shirts in some weeks. Elsewhere, the UK budget also dented consumer confidence whilst Europe performed better because the consumer lacked these political distractions. In addition, management noted that the consumer has become increasingly event and newness driven, and October lacked both of these. There were fewer releases from Jordan and Nike over the same month as the company tries to rebuild brand heat. Going forward, it is beginning to annualise the slower cadence of these Jordan drops. ....
The share price reaction this morning to what is no more than a finessing of forecasts for most is extreme. Courir should be EPS positive; the shares trade on a mere 7x PE – in our view too low for a retailer that is winning market share globally, even if 3Q was slightly below hopes. A clear Buy.
JD Sports Fashion^ (JD., Buy at 113p) -
Trading slowed in 3Q’25 with LfL sales down -0.3% yoy reflecting continuing weakness in the UK and a slowdown in North America, particularly in October ahead of the US elections. New space contributed +5.7% to growth leading to 5.4% organic growth in 3Q. Promotional discipline has been maintained with gross margin in 3Q’25 up +30bps. Given weak 3Q trading, guidance has been cut with adj. PBT now expected to be at the lower end of the previous guidance range of £955-1035m including Hibbett and despite more favourable FX. We think this would lead to a 2-3% cut to consensus expectations. Shares have declined 26% in the last two months and now trade at only the trade at only 7.6x 12m forward PE multiple and 4.4x EV/EBITDA multiple, but today’s update will not help the shares. Remain HOLD and cut our TP to 120p (from 135p) on reduced estimates.
Q3 sales: what happened? JD Sports'' Q3 sales are below expectations principally due to soft October trading and despite gross margin expansion. Group LFL sales were -0.3%. Management guides full year Feb-25 Group Adj. PBT to the lower end of its GBP 955-1,035m range, implying c.3% consensus downgrades, despite an improvement in currency rates. BNPP Exane View: at the lower end The weak share price has been indicating investor nervousness that JD Sports Q3 sales would be below sell-side expectations, which we think were +2% to +3% despite there being no comprehensive consensus available. We had forecast +2.3% and today the company reports -0.3%. The UK, North America and Asia Pacific were all soft. Gross margins were +0.3% as JD kept discipline in a promotional environment. We suspect the market was anticipating some drift of consensus profits, but with continued negative earnings momentum the shares could start down a touch. Likely direction of consensus FY Feb-25 Group Adj. PBT consensus sits at GBP 984m, per Visible Alpha. Today the company guides ''at the lower end'' of this guidance, despite a GBP c.10m improvement in currency rates since last reported. Hence, we expect consensus to trim by c.3% today. Anticipated market reaction JD Sports shares are -32% YTD (versus FTSE 100 Index +5%, FTSE 350 Retail Index -2%). Bulls will point to margin discipline and a fairly modest downgrade; Bears will point to the deterioration of sales through the quarter, continued negative EPS momentum and all this despite the stronger US dollar. We expect the shares to open down a touch. Conference call Conference call at 09:30 UK / 10:30 CET. Registration is here. Valuation JD Sports trades on CY24 P/E of 8.8x and CY25 P/E of 7.9x (at GBp 113, on our forecasts). Main points from Q3 sales . Q3 sales: JD Sports'' Q3 group LFL sales growth of -0.3% was below our expectations (+2.3%). The contribution from new organic space was +570bps (BNPP Exane...
Weak Q3 trading, particularly October. After a strong back-to-school period in August/September (in-line with Q2), October’s trading was more volatile in both North America and the UK. The promotional environment was highly competitive and mild weather did not help. In the US, both DTC and its peers were discounting plus the US consumer was cautious in the weeks preceding the election. JD maintained its commercial discipline, resulting in a 0.3%pts increase in Q3 Group gross margin (+0.4%ppt ex Hibbett acquisition). Footwear outperformed apparel & stores outperformed online. LFL weakness seen in most markets except Europe, as seen in Figure 3. Group organic Q3 sales were up 5.4% (LFL -0.3%). By region, UK Q3 organic sales were down -0.1% (LFL down -2.4%). North America Q3 organic sales grew 5.9% (LFL down -1.5% with all US fascias performing similarly). Europe performed well with Q3 organic sales up 10.4% and LFL +3.5%. Italy and Spain stood out as the strongest countries. Company anticipates FY25 PBT at the lower end of £955m-£1,035m guidance range (FactSet consensus £988m). This excludes the Courir acquisition which has been cleared by the regulatory authorities and should complete next week. INVe cut FY25E/FY25E PBT by 5%/6.6% respectively. We were ahead of consensus so FY25E consensus downgrade likely to be c3%. FY26E trimmed by more to reflect the partial mitigation of c.£30m extra NI UK costs. TP, now based on a CYPE 14x, cut to 200p (previously 230p). The implied downgrade is less than the more material downgrade implied by its valuation (CY25E PE of 8.2x ex Courir) with the Group’s attractive long term growth opportunities being overlooked, in our view. Comps get much easier from here, although evidence of better trading and market stability is probably needed before the material valuation gap is closed.
We lower forecasts to account for this softness and wage pressure in later years: FY25E from £990m to £960m, FY26E from £1,120m to £1,070m, and take £50m off FY27E. The shares have had a poor run and were discounting a difficult 3Q. They are very cheap. We reiterate Buy, TP 250p.
JD Sports Fashion^ (JD., Buy at 133p) - More than a sporting chance
adidas ups FY guidance again after better-than-expected Q3 adidas has increased FY guidance for the third time this year and is now expecting FY24 currency-neutral revenues to grow c10%, versus previous guidance of high-single-digit growth. Operating profit is now guided to be around €1.2bn (previously c€1.0bn), having started the year at €500m. The company assumes the remaining Yeezy inventory sold in Q4 is sold at cost (zero profit contribution) and would generate sales of €50m Q3 revenues grew 7% to €6,438bn or +10% at constant currency (Q2 +11% CC; Q1 +8% CC). Excluding Yeezy sales in both years, Q3 revenues were up 14% at constant currency (Q2 +16% which contained the Euros, Copa America Football and Paris Olympics). FX remains a headwind. Gross margin increased 2 percentage points to 51.3%. Encouraging news for JD Sports adidas’ strong accelerating brand momentum through FY24 contrasts with NIKE’s fortunes. NIKE recently reported Group revenues down 9% CC for the 3 months to end of August, and withdrew its FY guidance following a change of management. Helped by better innovation, sentiment continued to improve towards adidas with its recovery coming through faster than expected. A stronger and better performing adidas is good news for industry sentiment and wholesale partners like JD Sports. From a JD Sports shareholder’s perspective, short term growth concerns over demand volatility and NIKE’s underperformance is weighing on JD’s valuation (CY25E PE 8.5x), despite JD’s recent 1H results showing the strength of its multi-brand offer. Despite industry weakness, JD still delivered good LFL growth in North America (JD Q2 LFL +5.7% to the end of July) and Europe (JD Q2 LFL +3%), as well as reiterating its FY guidance. We believe JD’s current valuation does not reflect its strong global leadership position or its future growth opportunities. Next news from JD is a Q3 trading update up on 21st November. Comps get much easier in 2H. Further good momentum should help to reduce concerns over NIKE’s continued underperformance. Reiterate our BUY on JD Sports.
A volatile game JD Sports shares have fallen sharply since the company reported in early October despite its adj. PBT beat. Weighing on the stock have been the lower profit contribution from Hibbett, negative FX effects, no comment on current trading, and sentiment around Nike''s Q1 release. Cons. for FY Feb-26 looks a little ambitious, in our view, which is an additional hurdle for the stock. Yet on our own profit forecasts, which are broadly unchanged (first-time inclusion of Hibbett offset by neg. FX and higher minority leakage), we see significant re-rating potential, and maintain our Outperform rating. H1 results - an adj. PBT beat In early October, JD Sports'' H1 group adj. PBT of GBP 406m beat consensus expectations of GBP 385m, even excluding the GBP 13m contribution from Hibbett. The company did not publish current trading for August/September - not a big deal, in our view, as it reports quarterly (Q3 on 21 Nov). FY Feb-25 guidance - currency drag offsetting Hibbett Management reiterated its FY Feb-25 adj. PBT guidance range of GBP 955-1,035m, but this now includes Hibbett adj. PBT of GBP 25m - less than expected - and a further GBP c.10m drag from currency (a full year GBP c.26m drag). We raise our forecast from GBP 965m to GBP 980m. FY Feb-26 outlook - consensus may have to trim There''s still peak trading ahead but inside we turn our attention to the profit bridge for FY Feb-26. Consensus adj. PBT of GBP 1,116.5m appears a little ambitious, and we are 3% lower at GBP 1,081m. We assume that Hibbett generates EBIT of GBP 82m, or GBP 32m after finance costs. Reiterate Outperform Our DCF-derived TP remains at GBp 170 after integrating the Hibbett acquisition. The stock (at 128p) trades on CY25 P/E c.9x, too low in our view and we reiterate our Outperform.
JD Sports reported solid 1H’25 results with flat yoy adj. PBT and flat adj. operating margins, despite slower LfLs and continued investments in its supply chain, people and IT as it corrects past underinvestment. In trading too, it is worth acknowledging the 3.3% LfL growth in North America despite its biggest brand partner Nike reporting double digit declines. JD brand continues to push ahead with double digit organic growth in Europe, North America and Asia Pacific. Guidance range for full year adj. PBT of £955m to £1,035m (ex-Hibbett) has been maintained, but currency headwinds are greater than previously expected (£25m vs. £15m previously), which implies a 1% cut to underlying consensus expectations. The 1H results reflect well on the strength of JD’s multi-brand model. Shares trade at 10.3x 12m forward PE multiple and 5.0x EV/EBITDA multiple, a discount to UK omnichannel retail peers trading on c. 13x PE, but we think a sustainable improvement in LfLs is needed for the shares to rerate.
1H PBT 5.6% ahead of consensus showing strength of multi-channel/country/format approach The 1H results performance reflects a more subdued and volatile demand environment in its major markets and the impact that NIKE’s underperformance has had on the overall athleisure industry. For the 6 months to end of July, JD reported a 2% growth in adjusted Group PBT to £405.6m (INVe £390m; company-compiled consensus £384m) with FX negatively impacting by £6m. The Group reported sales were up 5.2% or +6.8% at constant currency with LFL +0.7%. Hibbett contributed £13m of profit in the 10 days of ownership, rather more than the normal £2-3m, as a better start to Back-to-School pulled into 1H. By region, US delivered strong 1H sales growth (+14.5%) with EBIT up 26%. Europe sales were up 14.7% with EBIT up 20.6%. UK sales were down 4.6%, with EBIT down 12%, reflecting subdued demand, far from ideal weather and weak innovation. Performance was helped by good execution, with Group EBIT margins up 20bp to 9%, despite investment in infrastructure, and gross margin down 20bps to 48.2%. Reiterated FY25 adjusted PBT guidance, which now includes a FX headwind FY25 adjusted PBT guidance range is £955m-1,035m pre Hibbett with Hibbett guided to contribute £25m at the PBT level (INVe £1,016m including a £35m profit assumption from Hibbett). Guidance has now been given at USD:GDP 1.34, and 1.20 for Euro, with a negative FX headwind of £20m expected in 2H. The difference between the top and bottom end of guidance range is the degree of market innovation. Management is still guiding to the bottom end, which is not a surprise given NIKE’s 1Q comments. Valuation undemanding given longer term growth opportunities, but NIKE’s underperformance a short term issue 1H was a solid performance given what was happening in the broader market, with strong execution limiting margin impact. We expect short term growth concerns over demand volatility and for NIKE’s underperformance to continue to weigh on JD’s valuation (CY25E PE 10x), especially after NIKE last night withdrew its full year guidance (see note NIKE's downgrade cycle is not over) and expects to be more promotional in 2H given elevated stock levels. Investors need short term reassurance around the industry rebound and future margin recovery potential before giving JD the benefit of the doubt; however, we continue to believe the current valuation does not reflect JD’s strong market position or its future growth opportunities.
JD Sports Fashion^ (JD., Buy at 150p) - Deepening foundations for sequential EPS growth
Underlying trading is pleasing, but a couple of technical issues mean we must shave forecasts despite the beat. Currency remains a headwind and trim FY25/26E 1%/2%. However, we believe focus should be on the day-to-day trading and the cheapness of the shares. Reiterate Buy, TP 250p.
Q1 sales decline 10%, roughly in line with guidance. EPS of $0.7 better than consensus expectations of $0.52 For the 3 months to end August, NIKE’s reported Q1 Group revenues fell 10% (down 9% CC). NIKE Direct was down 13% (12% CC; Q4 -7% CC) with a 20% fall in NIKE Brand Digital sales (Q4 -10% CC) partially offset by a 1% increase (Q4 2% CC) in NIKE-owned stores. Wholesale revenues fell 8% (-7% at CC) versus Q4 +7% CC. Converse revenue was even weaker with reported sales -15% (-14% at CC). Group gross margin increased 120bps, helped by lower product, warehouse, logistic costs and benefit from last year’s strategic pricing initiatives. Diluted EPS fell 26% to $0.7 vs FactSet consensus $0.52. North America revenues were down 11% (Footwear -14%/Apparel -10%) with Nike Direct -11%, NIKE Digital -15%, NIKE stores -1%, Wholesale down 11%, reflecting unfavourable shipping times. In Europe, Middle East & Africa revenues at CC fell -12% (Footwear -12%/Apparel -11%) with Nike Direct -12%, NIKE Digital -24%, NIKE stores +3%, Wholesale down 11%. NIKE withdraws FY guidance. Near term outlook expectations have moderated since beginning of year NIKE has withdrawn FY25 guidance (previously FY25 revenues down high single-digit) to give time for Elliott Hill, a NIKE veteran who takes over as CEO from John Donahoe in mid-October, to evaluate the business and reset strategy. The outlook for near term performance has moderated since the beginning of the year, according to management. After Q1, Retail sales are behind expectation across all channels, inventory is elevated and so more promotions are needed. Q2 guidance is for revenues down 8-10% with gross margins down 150bps due to higher promotions to clear inventory, channel mix headwinds, supply chain deleverage, and getting less of a benefit from lower product costs and last year’s strategic pricing action. Management does expect to see a slightly better 2H revenue trend versus 1H as newness improves, although the CFO does expect FY gross margin to now be down YoY. CFO is also watching the East Coast port strike in US closely as he is ‘yet to bake anything in forecasts for this.’ NIKE’s Wholesale spring order books for next year closed flat vs last year. This was behind expectations. The comment that ‘the multi-brand environment is very competitive today’ suggests to us that NIKE’s innovation will not be firing by then, it has more formidable competition versus history, and one should not expect any real momentum until end of 2025 at the earliest. Continued overleaf
Preview 1H25 results due 2nd October. Management reiterated FY25 adjusted PBT guidance of £955m-1,035m pre Hibbett (INVe £1,016m incl Hibbett), which includes a c.£55m annual profit benefit from an accounting policy change with amortisation of acquired intangibles now taken as an adjusting item below the PBT line. JD has already reported sales with 1H Group organic sales (at constant FX) up 6.4% with LFLs +0.7%. We are forecasting a 2% decline in 1H25 PBT to £390m (1H24 £398m). Hibbett was acquired right at the end of the period and is unlikely to contribute. Focus is likely to be on: (1) Whether the underperformance of JD is just down to NIKE’s weak innovation and promotional activity, and how promotional NIKE has been through 1H. NIKE will give its own Q1 update the evening before (1st October), so the market will have NIKE’s up-to-date thinking on the shape of its recovery when JD reports; (2) The UK is JD’s weakest region (1H LFLs down 3%) and its most mature. We would be interested in what needs to happen for the UK to return to growth. (3) New space growth in North America (organic +10.7%; LFL +3.3%) and Europe (organic +10.1%; LFL+3%) is crucial to achieving its FY28 targets, so how the new space and conversions are performing will be of interest. (4) An update on infrastructure investment plans, with the news Derby is closing having only just opened. Whether the ramp up of Heerlen is going to plan and if any addition expenditure is needed to integrate Hibbett’s Alabama RDC. No change to FY25E/FY26E PBT forecasts but the shape has changed to reflect the additional historic information given by management on the new segmented divisional split. There has been an immaterial change at the EPS level reflecting the profit mix impact on non-controlling interests.
JD paid $1,000m, or 6x EBITDA. That looks cheap to us on face value, and the opportunity to improve profit densities (à la Finish Line) and help the group supply chain could make it cheaper still. We add Hibbett to group numbers, upgrading them 5%, on unheroic assumptions. JD is a top pick.
JD Sports Fashion^ (JD., Buy at 128p) - Q2 FY25 TS - Reassuringly unexpensive
JD Sports reported an improvement in trading in 2Q with LfL sales growth of +2.4%, up from the -0.7% decline in 1Q helped partly by easier comps. Promotional discipline has been maintained with gross margin in 1H’25 down -10bps. This is a solid result in the current consumer environment. New space contributed +5.9% to growth leading to 8.3% organic growth (+4.9% in 1Q). Guidance range for full year adj. PBT of £955m to £1,035m (ex-Hibbett) has been maintained, which includes expectations for further LfL improvements in 2H as comps ease and innovation from key brands like Nike starts to land. JD is faced with a tough consumer demand environment particularly for apparel at a time when it is correcting past underinvestment in operations and systems, expanding rapidly and integrating acquisitions. A sustainable improvement in LfLs is needed for the shares to rerate. Remain HOLD.
Subdued Q2 growth expected given more difficult market backdrop, volatile demand, weak apparel + Nike innovation JD Sports has reported 2Q Group organic sales up 8.3% with LFL sales down 2.4%. This is a sequential improvement on 1Q (organic sales up 4.9% with LFL down 0.7%), helped by weaker comps, as expected. Performance continues to be impacted by a more challenging market backdrop where demand remains volatile. Gross margin for the Group in the period was 48.4%, down 30 bps YoY mainly due to a decline in apparel and online. Focus will be on continued weakness in the UK (2Q LFL sales fell 0.8% vs 1Q -6.4%). However, there are encouraging signs in North American (2Q LFL +5.7% vs 1Q +2%), where performance picked up materially QoQ, despite a continued weak market backdrop and promotional environment. Europe and Asia reported double digit organic sales growth, driven mainly by space. Europe organic sales grew 10.5% (1Q +10.8%) with LFL sales +3% (1.6%). Asia organic sales grew 10.5% (1Q +10.1%) with LFL sales +0.1% (1Q down -0.1%). On track to achieve previous FY guidance Management has reiterated FY25 adjusted PBT guidance of £955m-1,035m pre Hibbett, which includes a c.£55m annual profit benefit from an accounting policy change with amortisation of acquired intangibles as an adjusting item now taken below the PBT line. We had already updated our forecasts to reflect the completion of the Hibbett acquisition at the end of July, with our underlying forecast ex Hibbett towards the bottom end of the guidance range (see note Adding Hibbett, published 21/8/24). The undemanding valuation (CY25E PE 8.4x) suggests to us that investors continue to question how long NIKE’s underperformance may weigh on JD’s short term growth. While we believe the valuation does not reflect the strength of JD’s market position, its future growth potential, or the Hibbett acquisitions, investors still need confidence around the industry rebound and future margin recovery potential. Evidence of this is unlikely until 2H when better innovation should start to come through from NIKE.
There are no changes to guidance today, but we shave 2% off numbers for FX. That should not detract from a very pleasing update, with the key takeaways being that JD continues to win market share, with its global presence making it the preferred partner to the global brands. The shares are seriously undervalued in our view, and we reiterate Buy, TP 250p.
Visiting stores reminds us just how far ahead of the competition JD is (and the same is true in many places overseas). We expect that JD will continue to win market share in an attractive industry. The multiple should be much higher. We maintain our TP of 250p and Buy recommendation.
Adidas raises FY24 guidance for second time with momentum building Q2 on Q1 Adidas (N/R) has increased FY24 guidance (December year end) for the second time this year, after better-than-expected 2Q results for the 3 months to end-June, and ahead of its 1H update on 31st July. The beat was driven by an acceleration in momentum and better profitability. Management’s FY24 guidance is now for high single-digit CC revenue (previously mid to high single-digit) and operating profit of c.€1.0bn (prev. €700m). Within this guidance is the assumption that the remaining Yeezy inventory will be sold at cost and generate a further c.€150m of sales. FX remains a headwind, particularly in 1H. Momentum improved QoQ with Adidas’ Q2 revenues up 9% YoY (+11% CC) versus Q1 revenues +4% (+8% CC). Ex Yeezy sales in both years, revenues grew by 16% at CC. The Q2 gross margin was 50.8% (2023: 50.9%) with the underlying Adidas margin up strongly, reflecting better sell-through, lower discounting, lower sourcing costs, and a more favourable sales mix. The smaller Yeezy business impacted negatively. Q2 EBIT grew to €346m (2023: €176m), with c.€50m from the sale of Yeezy inventory. Main uncertainty for JD shareholders is how long NIKE’s underperformance may remain a drag Adidas’ improving performance contrasts with NIKE’s profit warning last month and NIKE’s guidance for FY25 revenues (May year end) to be down mid-single digit, with 1H down high single-digit and Q1 revenues down 10%. While a better Adidas performance is positive for industry sentiment, from a JD shareholder’s perspective the main uncertainties are how long NIKE’s underperformance may remain a drag (NIKE (N/R) accounts for over 50% of JD’s Group sales); the scale of the profit contribution from the proposed Hibbett acquisition given its higher NIKE exposure (69% of FY23 sales); and whether the US will have a less promotional holiday season this year. It will be too early to know the answers when JD Sports next reports in mid-August (2Q update), especially as its profits are expected to be more 2H weighted than usual. We are yet to publish updated estimates post FY24 results (end May) as JD is changing its segmental reporting. We are waiting for the company to provide full historics and the impact of accounting changes on the new segmentations. Our existing forecasts are towards the bottom end of management’s FY25 guidance for an adjusted PBT range of £900m-£980m pre-accounting changes (non-cash amortisation of acquired intangibles to be taken below the PBT line) and the Courir/Hibbett acquisitions. JD’s valuation (CY25E PE of 8.4x) remains undemanding and we believe does not reflect its strong market position, longer-term growth potential, or the benefit to profits from the proposed acquisitions.
NIKE missed on Q4 and reduced FY25 guidance last night NIKE reported flat Q4 (end May) constant currency revenues of $12.6bn (reported basis down 2%) versus FactSet consensus of $12.86bn. Performance product performed strongly, but this was more than offset by double-digit declines in Lifestyle. In Q4, Nike Direct was down 7%. Nike Stores were down 2%, and Nike Digital was down 10%, with Wholesale growing 8%. In North America, Q4 revenue declined by 1%. Nike Direct was down 9%, with Nike Digital down 11% and Nike Stores down 5%. Wholesale grew 6% due to accelerated shipping timing from Q1 of Fiscal ‘25. In EMEA, Q4 revenue grew 1%. Nike Direct was down 8%, as Nike Stores grew 1% and Nike Digital declined 14%. Wholesale grew by 7%. NIKE also cut FY25 guidance, reflecting an acceleration in mix change, a soft China, and more volatile macro generally. It now guides to FY25 revenues down mid-single digit, with 1H down high single-digit (previously 1H down low single-digit). Q1 revenues are guided to be down 10%. Management is looking for meaningful sequential improvement in quarterly performance as the year progresses and it scales newness in the range. As the brand reset continues, NIKE is focused in FY25 on sharpening its focus on sport, accelerating its innovation, bolder storytelling, and elevating the entire marketplace. Negative read-across to JD; continued weak NIKE performance likely to weigh on sentiment towards JD Key points we would pull out from JD’s perspective is that (1) NIKE’s Wholesale performance was stronger than its DTC, and (2) NIKE is trying to accelerate its innovation and product mix changes, which is a factor behind NIKE’s reduced FY guidance. NIKE’s warning is likely to raise concern over the achievability of JD’s FY25 guidance (profit split will be more 2H weighted than usual anyway), with uncertainty over how long NIKE’s underperformance may remain a drag, and the short-term profit contribution from the proposed Hibbett acquisition given its higher NIKE exposure (69% of FY23 sales). We should have a clearer view on NIKE’s strategy towards the end of the current calendar year. Next news from JD – Q2 update mid-August. JD’s management reconfirmed at the end of May its FY25 guidance for an adjusted PBT range of £900m-£980m pre-accounting changes (non-cash amortisation of acquired intangibles to be taken below the PBT line) and the Courir/Hibbett acquisitions. The top end was based on an improvement in macro and innovation from its key partners. We are towards the bottom end. Note we have not republished forecasts post FY24 results (end May) as JD is changing its segmental reporting. We are waiting for the company to provide full historics and the impact of accounting changes on the new segmentations.
Down but not out JD Sports shares have underperformed its retail peers year to date as consensus earnings estimates have fallen. Investor concerns include industry inventory overhangs, JD Sports'' exposure to Nike whose brand heat seems to have cooled, and the use of the balance sheet on acquisitions. We address these debates and argue that the industry outlook is improving, JD''s multi-brand format gives it scope to grow, and that MandA makes strategic and financial sense. On broadly unchanged forecasts, we continue to argue for a multiple re-rating and reiterate our Outperform rating. Debate #1: Industry Inventory levels Elevated inventory levels have pressured gross margins and also restricted product newness. We argue that inventories are close to normalising and that this should support profitability in the quarters ahead as markdown levels also normalise. Debate #2: Dependence on Nike Nike is JD Sport''s most important brand supplier, at c.55-60% of JD Sports'' sales, and JD is Nike''s largest wholesale customer. Nike''s brand heat cooling will affect JD, but we think that other brands will enable JD to grow like for like sales. JD''s North America LFL of +2% in Q1 reassures us. Debate #3: Growth agenda JD should be able to deliver at least 5%pa sales growth from net new space over the coming years. In addition, the proposed acquisitions of Hibbett, Inc. and Groupe Courir could add c.6% to earnings pre-synergies. We dive into the US market and argue that MandA makes strategic and financial sense. Reiterate Outperform We adjust our forecasts for new segmental disclosure, leaving them broadly unchanged. We think that JD Sports shares remain attractively valued, trading at CY25 P/E 8.7x. We continue to argue for a multiple re-rating and reiterate our Outperform rating with an unchanged TP of GBp 170.
JD Sports Fashion^ (JD., Buy at 134p) - FY24 results - no new shocks or surprises
There is nothing in the prelims to put off a marginal buyer: indeed the plans for the US (Hibbett, etc) and Europe (Courir, etc) are compelling, and the new store maths are improving. Even after a minor run, the shares continue to reflect bad rather than good news ahead, and that, in our view, offers a very good opportunity. We reiterate Buy, TP 250p.
JD Sports Fashion^ (JD., Buy at 128p) - FY24 results on 31 May
Guidance already given for FY24 and FY25 Management has already guided the market to FY24 PBT (January 2024) in the £915-£935m range (INVe £921m; FactSet consensus £931m), so no surprises are anticipated. JD Sports is due to change its segmental reporting structure, which may need some unpicking. Focus is likely to be on the UK to see how much profits were impacted by weak 2H apparel sales pre-Christmas from warm weather and weak innovation, with the tech fleece category particularly challenging. US profits were impacted by a promotional pre-Christmas market and Nike (N/R) promoting site-wide. We are also looking for any update on when the Courir deal (France), which needs competition approval, might complete and confirmation the Heerlen distribution centre ramp up is on track. FY25 guidance was given at the end of March and is for an adjusted PBT range of £900m to £980m pre accounting changes and the Hibbett acquisition (FactSet consensus FY25 PBT £967m; INVe £926m ex Hibbett). This is based on 6-9% organic sales growth, with the top end of the range assuming a return to a better innovation cycle from the brands. An accounting change has been flagged with non-cash amortisation of acquired intangibles to be excluded from PBT before adjusted items from FY25. This should increase PBT by c.£55m a year, so post accounting change, the FY25 guidance range is £955m to £1,035m. We estimate Hibbett should add c.8% to FY25 guidance when completed. Short term headwinds but longer term growth potential not reflected in valuation Valuation (CY25E PE 8.8x) suggests to us that investors are questioning the achievability of its 5-year ‘JD First’ strategy set out in February 2023 and how long it may take NIKE to get its innovation mojo back. JD has effectively ‘lost’ 2 years of profit growth with a return to FY23 profit levels not anticipated by consensus until FY26. An improvement in 1H trading seems unlikely given JD’s more challenging 1H comp (Group revenues 1H24 +8.3%: 2H24 1.3%) and NIKE itself has guided to its 1H revenues (June to November) being down low single digit, with a recovery not expected until 2025. JD’s shares are likely to underperform until there is more confidence in short term earnings, however, we believe valuation does not reflect the strength of JD’s market position, future growth potential nor the benefits of the proposed acquisitions.
JD Sports Fashion^ (JD., Buy at 116p) - Hibbett move - a good potential jigsaw piece
The proposed Hibbett acquisition was a surprise given the Group is yet to complete on Courir. Hibbett will be another complementary format which seems contrary to management’s ‘JD First’ strategy. However, in our view, the deal makes financial and strategic sense, adding scale to the Group’s North American business with little overlap. The business is being acquired on depressed earnings and should also benefit from any market recovery. Our scenario analysis suggests Hibbett could enhance FY26 earnings by 8%. Weaker FY25 guidance pre-Easter drives our 10%/9% downgrade in FY25E/FY26E PBT, before announced accounting changes for amortisation. Our forecasts do not include the proposed Courir and Hibbett acquisitions, which we estimate could offset our FY26E downgrade. NIKE’s lost innovation mojo is expected to hold back industry growth into 2025. While NIKE has guided to sales growth in the 12 months to end May 2025, it has said that 1H revenues (June to November) are expected to be down by a low single-digit amount with momentum building through 2024 and into 2025. Indeed, Adidas has said it still has too much stock in the US and so is likely to remain challenging into 2025. Valuation (CY25E PE 9x) suggests to us investors are questioning JD’s growth prospects and the achievability of its 5-year ‘JD First’ strategy set out in Feb’23. JD has effectively ‘lost’ 2 years of profit growth as a return to FY23 profit levels is not expected by consensus until FY26. While we believe valuation does not reflect the strength of JD’s market position, future growth potential or the benefits of the proposed acquisition, investors still need confidence around the industry rebound and future margin recovery potential.
JD Sports Fashion Plc Foschini Group Limited
Call summary Following JD Sport''s surprise acquisition announcement this morning, management provided a bit more detail on the deal. Questions focused on the impact on the store portfolio, deal mechanics, synergies and supply chain benefits. Overall, management sounded confident on the strategic benefits, particularly on store presence and supply chain, that Hibbett brings to the JD Group. We reiterate our Outperform. Key takeaways from the call: . Store portfolio: management believes Hibbett''s current store portfolio is in a ''good shape'', with Hibbett historically spending USD 60-70m capex per year on refits and refurbs. Management does not plan to rebadge any of Hibbett''s stores as it believes these benefit JD''s smaller markets proposition (like Shoe Palace), providing a more localised offering to consumers. Management believes Hibbett''s store locations ''close the gap'' between JD''s presence in shopping malls and Hibbett''s ''walk to store'' (outside shopping malls) presence. . Deal mechanics: in year 1, the deal is expected to be low-to-mid-single digits accretive to earnings, pre synergies. Hibbett will be acquired through JD''s minority shareholding in Genesis, resulting in JD holding 80% and Genesis the remaining 20%, with the risks and rewards shared equally. . Synergies: these should largely come from back-office integration and Hibbett''s efficient supply chain. Hibbett has a lower cost to serve than JD, therefore JD plans to learn from their efficiencies. Additionally, JD plans to leverage Hibbett''s strong supply chain to support accelerated growth across the JD Group in North America. . Supply chain benefits: the US is a saturated market and management does not believe that its existing warehouses (West and North) can provide the growth needed to scale JD in the US. Hibbett''s warehouse in Alabama has the capacity required to expand JD''s business and serve the full country. . Where do the shares go from here? Having fallen 29% year...
This is a highly pleasing deal to us. It is struck on a sensible multiple and should help JD’s growth in the US, which has already been stellar. In our view the shares do not reflect the potential to grow further when consumers in the UK and the US recover. The story is enhanced by today’s deal. We reiterate our Buy recommendation and 250p TP.
Acquisition expected to be earnings enhancing in first full year The proposed acquisition of Hibbett in the US for an implied equity value of $1,083m (£878m) at $87.50 per share or an enterprise value of $1,109m. The deal will be financed with cash and a £1,000m extension to the Group’s banking facilities. FactSet consensus suggests Hibbett will make FY25 PBT (Jan year-end) of $124m for the year to Jan’25 (JD Sports consensus FY25 PBT £925m), EBITDA of $182m, and EPS of $8.25. This implies a forward take-out PE of 10.6x ex synergies or an EV/EBITDA of 6.1x. It is anticipated that synergies will be c£25m and the deal will be earnings accretive in its first full year of ownership. The deal will help accelerate the Group’s growth in the US. On a pro forma basis, the combined revenues of JD and Hibbett in North America would be approximately £4.7bn and increase North America’s share of Group sales from 32% to approximately 40%. Hibbett has c1,169 Hibbett City Gear and Sport Additions stores (average size c.5,860 sq.ft. located in 36 states with the heart of the business being in Southeastern US. The deal is expected to complete in 2H. It is a class 2 transaction under UK listing rules and will need Hibbett shareholder approval as well as clearance under the US Hart-Scott-Rodino (HSR) Antitrust Improvements Act Reiterate BUY We view this as a reasonable price to pay for a business which will strengthen the complementary concept business in the US and give the Group a stronger platform from which to grow the JD Sports brand. Like the acquisition of Finish Line, this could turn out to be a well-timed acquisition at the bottom of a cycle, but there is always risk with any integration process. Shorter term, the focus is likely to remain on the weak consumer backdrop in both the US and UK and the lack of innovation coming from Nike which is impacting market growth. Longer term, we continue to believe JD has an attractive growth opportunity which is being undervalued by the market with the shares trading on an undemanding CY25 PE of 8.2x on consensus earnings. Our forecasts and TP are under review and are not yet updated for FY25 guidance given pre-Easter.
JD Sports Fashion^ (JD., Buy at 118p) - Proposed acquisition of Hibbett (HIBB US)
Meeting Notes - Apr 05 2024
Our expectations for a rebase in margins were a large part of our cause for caution on JD Sports. Guidance for the year ahead has been struck more cautiously, with a wide range and 'show your workings' of the LFL growth required to underpin delivery at either end. This approach, plus an emphasis on
JD Sports Fashion^ (JD., Buy at 132p) - Model update following FY25 guidance
Good Thursday - guidance less bad than feared JD Sports'' FY25 guidance was better than feared. Management expects a sequential improvement through the year, as market conditions and product newness improve, and reiterated its growth strategy. Our underlying forecasts still fall, albeit optically not materially, due to a change in accounting treatment. Our DCF-driven target falls because the net cash pile is smaller than hoped, but we see plenty of scope for the shares to re-rate further - we maintain our Outperform rating. A challenging sports arena, but strategy on track As other retailers and brands have commented, current conditions remain challenging in sporting goods. However, JD has a number of drivers, including new store roll-out, JD format conversions, a new loyalty programme, faster online fulfilment in Europe, growth through smaller brands (e.g. encouraging trial with Hoka), and a supply agreement with Nike. The ''terrace'' trend is still resonating strongly at its high-heat store fascia, size?, which is a good sign for the longevity of the trend. FY Feb-25 guidance, consensus likely to fall c.6% underlying Management guided FY Feb-25 LFL sales growth of +1% to +4%, and this variance is the main determinant of the profit range provided. Management guided Adj. PBT of GBP 900-980m but will now treat acquisition intangibles as an adjustment and so the ''new money'' range is GBP 955-1,035m. We cut from GBP 1bn to 925m on the old basis, or to GBP 980m on the new basis. Kicking on ... the dust has begun to settle As a result of the new definition of Adj. PBT our forecasts fall minimally. On these forecasts, the stock (at GBp c.135 intraday) trades on CY24 P/E c.10x, or c.9x ex-cash. Our target price falls to GBp 170 (from GBp 180), which implies that in one year''s time JD would trade on c.12.5x forward earnings. Such a re-rating may still seem remote, but we think there could be a number of catalysts, e.g. balance sheet usage, more regular...
JD’s trading update reports FY24 profit expectations in line with its previously reduced guidance range of £915-935m. We move our forecast for FY24 to the midpoint at c£926m (vs £915m previously) and reduce FY25 expectations to £950m (£975m previously) assuming organic sales growth of 6%. We continue to believe execution risk remains in relation to product strategy (Nike particularly) and international expansion. Our Hold recommendation and 135p TP remains unchanged. News: JD has delivered FY24 organic revenue of +8% (4% LFL) in line with previous management expectations of +8%. We note recent newsflow from Nike and Adidas highlighted a softer outlook and recent underperformance in Apparel across Europe particularly. JD’s exposure to apparel softness in the UK particularly (constituting 50% of sales) was highlighted with a Q4 LFL sales decline of -3.2%. Management expects FY25 delivery to be H2 weighted with a strong sporting calendar and product launches. For that reason, Q1 is likely to produce the softest LFL sales performance. Estimates: Our estimates now assume JD sports achieves c£926m of PBT in FY24 (vs £915 previously). We assume JD can deliver 6% organic growth in FY25, versus management’s previous target to deliver double digit revenue growth. Accordingly, we reduce our PBT estimate to £950m (£975m previously) and albeit comparatives are set to ease over FY25, we do not assume an improvement in FY24 gross margin performance (-50bps) owing to heightened promotional activity. Our FY25 PBT forecast below does not include non-cash acquired intangibles amortisation (c£55m increase to PBT). Valuation: JD Sports continues to trade at a discount to UK non-food Retail sector (c11.5x) on c10x FY24 PE. We believe JD will continue to be valued more in line with M&S and Kingfisher (deemed legacy retailers that have embarked on extensive restructurings) until it can evidence success in its international expansionist approach. Conclusion: JD Sports’ investment case rests on its ability to scale a traditional retail model at a time when key suppliers are guiding to softer sales outlooks into FY25. We are happy to remain bystanders until JD’s end markets become more supportive and management can demonstrate navigation against margin pressures, whilst deploying capital through its store roll out programme. Management continues to cite lack of product innovation and we remain cautious on the direction of Nike’s product strategy. Nike’s Q3 earnings call cited an intention to reduce supply of originals inclusive of its Air Force 1 footwear model. Management previously attributed lost sales in June 2023 to a lack of Nike’s core Air Force product. We await to see how the introduction of new higher price point lines resonate with JD’s core customer (16-24).
Key Stocks Renew Holdings # (RNWH LN) (Buy, TP 950.0p) - Continued positive momentum (Tuesday 02 April, Trading update) Hilton Food (HFG LN) (Buy, TP 1,030p) - Back on track (Wednesday 03 April, FY results) Topps Tiles # (TPT LN) (Buy, TP 70.0p) - Can't fight the tide (Wednesday 03 April, P2 update) Stocks Previewed Alliance Pharma, discoverIE #, Ferrexpo, Gaming Realms #, Hilton Food, Impax Asset Management #, International Personal Finance #, JD Sports Fashion #, Mears, Norcros, Pod Point, Renew Holdings #, Rentokil Initial, Topps Tiles #
JD/ RNWH HFG TPT PODP IPX MER NXR DSCV RTO GMR FXPO IPF DVL
JD Sports Fashion^ (JD., Buy at 116p) - Trading statement - weak Q4 brighter skies
Focus on FY25 – Expect 5%-6% cut to consensus FY25 PBT before accounting changes Management has belatedly given FY25 guidance after issuing a profit warning in January post a more promotional peak trading period in the US and a subdued UK performance. FY25 guidance is for an adjusted PBT range of £900m to £980m (company- compiled consensus FY25 PBT is £979m) pre accounting changes. This is based on 6-9% organic sales growth with the top-end of the range assuming a return to a better innovation cycle from the brands. UK profits are expected to be down YoY with c.200 stores to open mainly in Europe and the US. Management has also announced an accounting change and will exclude non-cash amortisation of acquired intangibles from PBT before adjusted items from FY25. This brings it in-line with others and will increase PBT by c.£55m a year, so post the accounting change, the FY25 guidance range is £955 to £1,035m. Current trading remains challenging due to less product innovation and elevated promotions, which we have already heard about from NIKE (N/R), Adidas (N/R) and others in updates over the last month. Q4 UK LFLs down 3.4%, with Europe up 0.9% and North America +2.1%. For completeness, management confirms its FY24 guidance, which was lowered in January to FY24 PBT in the £915-£935m range (consensus £921m), from £1.04bn previously. It opened 215 new JD stores. Q4 LFL sales were up 0.1% and organic sales were up 4.4%. There is no news on the proposed Courir acquisition as yet. Forecast and TP placed under review Shares are down 30% over last 3 months, impacted by January’s profit warning and subdued outlook statements from the global brands and its peers. JD not only has tough comps in 1H25 (1H24 Sports Fashion sales +8.9%; 2H24E 4%), but short term demand concerns over the US and UK consumer are likely to persist until the Autumn at the earliest, in our view
Headline PBT numbers do not change today, but to be clear, that is a function of an underlying £55m downgrade, which coincidentally is precisely offset by accounting changes. We are much more optimistic than the valuation, and expect a change in sentiment towards JD as momentum returns. We retain our 250p target price and Buy recommendation.
Little optimism from NIKE’s short term outlook as reset expected to impact 1H25 growth (Autumn 24) NIKE’s Q3 earning may have been slightly ahead of consensus expectations ($0.77 vs FactSet cons £0.76), helped by gross margin and a reasonable US performance (see overleaf for detail), but the market focused on management’s FY25 outlook. NIKE (N/R) has a May financial year end. Management guided to FY25 revenue and earnings growth with margin expansion, excluding restructuring costs, but 1H revenues (June to November) are expected to be down low single digit with momentum building throughout the year and into FY26. 1H25 revenues will be impacted near term from the lifecycle management of key product franchises such as Air Force One & Pegasus, with management looking to restrict availability and shift to increasing innovation, such as the Air Max Dn (launch next week). It also expects the subdued global macro-outlook to continue. As part of its brand reset and return to growth and sustainable high margins, NIKE’s management is focused on 4 areas: 1) Sharpen its focus on sport; 2) Ensure a continuous flow of innovative product; 3) Bolder marketing; and 4) Lean into its Wholesale partners to elevate the brand and grow the total marketplace. In Q3, new and updated footwear models accounted for the majority of NIKE’s top 20 growing footwear franchises. NIKE admits that more recently it has been too focused on achieving the 40% digital or 60% direct mix targets, when the consumer is clearly shopping in a multi-brand retail. This suggests NIKE will offer its Wholesale partners more support. JD Sports due to give FY25 guidance on 28th March. 1H could still be challenging JD not only has tough comps in 1H25 (1H24 Sports Fashion sales +8.9%; 2H24E 4%), but it is clear from NIKE’s Q3 comments that there are likely to be lower levels of key NIKE stock lines in calendar 2024 as NIKE reins in key legacy franchises. We believe the Air Force One Lifestyle franchise is a particularly important one to JD. The question is whether Adidas and other brands can sufficiently fill NIKE’s innovation and volume headwind to maintain reasonable sales momentum in FY25. Continued overleaf
Adidas management’s view on trajectory of its recovery unchanged. Still much to do in FY24 While Adidas’ FY23 operating profit came in better than guided, this was mainly due to less write down of Yeezy inventory as Adidas decided to sell it through. Excluding the Yeezy revenues in both years, currency-neutral revenues were up 2% yoy in 2023. Adidas’ recovery plan set out in FY23 is unchanged. Then, management thought FY23 would be a breakeven year (FY23 operating profit was €268m), with things starting to improve in 2024, that 2025 would be far more profitable, and that in FY26 Adidas should be back to being a double-digit growth company with a double-digit EBIT. Adidas’ FY24 guidance is for mid-single-digit currency-neutral revenues growth, which assumes the rest of Yeezy inventory (c.€250m) is sold at cost. Excluding the Yeezy revenues in both years, the top-line guidance reflects currency-neutral growth at a high-single-digit rate in the underlying Adidas business. By quarter, sales growth is expected to improve from quarter-on-quarter with some growth in Q1 improving to double-digit in 2H. FY24 operating profit guidance is €500m. Management believes its new product pipeline is good and ready for the year of sport in 2024 - Olympics (not a commercial event), the Euro and COPA. US has too much inventory and likely to be FY25 before sorted. Europe in a good position and selling at full price From a JD Sports perspective, the most interesting comments were on inventory. Adidas ended the year with a ‘healthy‘ €4.5bn of inventory, including €250m of Yeezy. All regions are in good shape except for the US. Adidas management thinks the US is unlikely to be sorted until FY25 as it is 6-9 month behind the rest of the company in getting back to a healthy inventory position. New stock is selling-through fine and Adidas’ order book is starting to move from being down to being up. However, according to Adidas management, there is still excess inventory in the US industry generally. News on Europe is more positive. Adidas’ inventory is clean, and it isn’t discounting in its DTC business (discount rate single digit for the first two months of the year). While more positive noises are coming from Adidas, what NIKE will say on 21st March (Q3) is more important for improving sentiment towards JD Sports. NIKE’s weak performance/high discounting at the end of 2023 contributed to JD’s January profit warning. JD is belatedly giving FY25 guidance on March 28th. Given challenging 1H comps, we do not see March’s update as a trigger for a share price re-rating as short term demand concerns over the US and UK consumer are likely to persist. Heading2 Video provides a powerful way to help you prove your point. When you click Online Video, you can paste in the embed code for the video you want to add. You can also type a keyword to search online for the video that best fits your document. To make your document look professionally produced, Word provides header, footer, cover page, and text box designs that complement each other.
Whilst Q4 was better than expected, Foot Locker share price reacted negatively to FY26 EBIT target moving to FY28 Foot Locker reported a better-than-expected Q4 to the end of February, which is 1 month more trading than JD Sports last reported. Foot Locker’s Q4 comp sales decreased 0.7% (Q4 guidance: down -7% to -9%; Q3 down -8%), driven by a 210 bps impact from repositioning the Champs Sports banner (Q4 comps -10.4% : Q3 -20%), consumer softness, and changing vendor mix. Management put the better performance down to its transformation strategy gaining traction. Of particular interest from a JD perspective is North America, where Foot Locker & Kids Foot Locker banner comp sales grew 5.2% (Q3 -4.9%). Whilst the timeframe is not directly comparable, JD Sports last talked about high single digit US organic growth when it warned in January. We have already heard from JD and others that December was particularly promotional, with NIKE promoting across the board. Foot Locker’s gross margin was down -350bps primarily due to promotional activity. On the call, the CFO commented that he believed there is no structural reason why it cannot recoup gross margin back over time. Foor Locker’s inventory levels were down 8.2% at the end of Q4 (down 7.8% ex FX fluctuations), though management gave the impression there is more to go after. Foot Locker management expects 2024 to be another year of investment and a return to growth with Nike (non-Nike brand sales now 40% of total). EPS guidance of $1.5-$1.7 (FY23 $1.3) implies EPS growth of 15%-30% with sales -1% to +1% (incl 1% headwind from 53rd week), comp sales up 1-3% (space down 1%) and recovery in gross margin to 29.8%-30.0% (FY23 27.7%). Foot Locker’s share price (off c.29%) reacted negatively to the news its longer term 8.5% to 9% Lace Up EBIT margin target (FY23 1.7%), set at March 2023’s CMD, has been pushed out to FY28 from FY26, citing its lower starting point as it exits 2023. Next news from JD – Delayed FY25 guidance due at the end of March JD’s management is due to give FY25 guidance at the end of March (FactSet consensus FY25 PBT £980m) and report FY24 results at some point in May. Post JD’s January profit warning, and given challenging 1H comps, we do not see March’s update as a trigger for a re-rating of its shares given short term demand concerns over the US and UK consumer are likely to persist until the Autumn at the earliest in our view. Valuation (CY25E PE 9x) is undemanding given JD’s longer term growth opportunities.
JD Sports Fashion^ (JD., Buy at 119p) - Provisional forecasts & recommendation
An intense promo environment and a value sensitive consumer made for painful peak trading leaving double-digit margins even further out of reach. This update compounded our concerns on the step change in inventory risk and underlying profitability. From here, volume & space contribution must of
Erratum: This report is a correction to the document published at 16:08 UK time today to incorporate changes to our target price and estimates which were not properly reflected in the initial publication. Christmas nightmare JD Sports delivered the first retailer warning of the year, following on from the Nikemare Before Christmas, resulting in a double-digit cut to FY Feb-24 forecasts. It attributed this to weather, high levels of promotional activity across the industry, apparel pricing, and calendar effects. The bigger question is the outlook for FY Feb-25, and management will provide guidance in March. We cut our forecasts by 13% to Adj PBT GBP 1bn, which is about what we expected them to deliver this year. The dust needs to settle but we stick with it - we still believe JD is well positioned and undervalued. Sales and gross margins miss Organic sales growth in the 22 weeks of H2 to 30 Dec were +6%, with LFLs of +1.8%. This was below management expectations, and notably only achieved through higher discounting (in the US in particular). Management gave several reasons: mild weather, unexpectedly promotional industry, calendar impacts, uncompetitive pricing in certain apparel lines and competition. FY Feb-24 Adj PBT guidance was cut from GBP c.1,040bn to GBP 915-935m, with the majority due to the sales miss. Looking for Guidance Management will provide FY Feb-25 Adj PBT guidance in March. We reduce our estimate to GBP 1,000m from GBP 1,150m. There is uncertainty about how much of the challenges relate to specific brand partners, and how much to transient issues like weather and inventory positions. We think LFL growth of c.4% and a modest margin recovery is plausible, but investors will look for evidence first. Kicking on ... once the dust settles On our new base case forecasts, the stock (at GBp c.120 intraday) trades on CY24 P/E c.9x, or c.7x ex-cash. Our target price falls to GBp 180 (from GBp 215) after this warning, which would imply that...
JD Sports Fashion^ (JD., Under Review (from Buy) at 120p) - Warning on sales & gross margin
External factors are mostly to blame here. The consumer is cautious and looking for a deal and with no especially exciting launches, it has been a dullish period. JD’s forecasts cannot defy these forces and we downgrade 2024E PBT from £1.04bn to £920m, and next year’s from £1.1bn to £980m. The probable weakness in the shares should offer a good opportunity to buy a growing market leader. We reiterate our Buy rating and 250p TP.
FY24 PBT guidance cut to £915m-£935m (guidance at 1H results was in-line with market expectation of £1.04m). Taking the mid-point, this is 11% below company-compiled FY24 PBT consensus of £1,043m. Both sales growth & gross margin have come in below expectations. Apparel revenue growth was impacted by milder weather, while peak trading was softer and more promotional than management expected, reflecting a weaker product cycle and more cautious consumer spending. The shift in mix to lower gross margin footwear and a more promotional environment means FY gross margin is expected to be down YoY (previously up). Also, £15m of the downgrade is non-trading with a £7m impact from reclassification of capex to opex (IAS38 software) and £8m lower interest income following the ISRG NCI acquisition. Sales slowed materially on 1st 7 weeks (10% organic growth) with constant currency organic revenue growth up 6% (LFL +1.8%) over the 22 weeks to 30th December. No breakdown has been given by region but we suspect the biggest profit impact will have been from the UK (highest apparel mix/2H sales likely to be negative/higher relative cost growth with minimum wage) and the US (Peers/Nike talked about more volatile 2H sales/consumer weakness as well as the US market generally being a more promotional market). FY24E/FY25E PBT cut by 12%/14%, reflecting new FY24 guidance and more cautious FY25E growth assumptions. Initial management guidance for FY25 is expected to be given in March. Whilst a downgrade is disappointing short term, JD has a strong proposition, is executing well against its 5 year plan (over 200 stores to be opened in FY24) and we believe has a material long term growth opportunity. Reduced TP of 235p (prev 300p) reflects downgrade.
Estimate changes: JD Sports Fashion (JD.L, Price 166p - Buy - TP: 300p)
Further evidence US sporting goods category dynamics remain robust After a robust Q3 performance, both Dicks’ Sporting (DIX: NYSE, N/R) and Hibbett (HIBB: Nasdaq, N/R) raised FY guidance yesterday, which supports our positive view of JD Sports’ 2H24 prospects and its ability to drive a better 2H margin helped by lower discounting YoY. We believe short-term US concern, which has weighed on the share price performance, is overdone and JD Sports’ undemanding valuation (CY24E PE 9.3x) does not reflect how well JD is placed to deliver double-digit growth per annum over its five-year ‘JD First’ plan. Next news: JD Sports’ January trading update / Nike Q2 Dec 21 / Foot Locker Q3 Nov 29. Key takeaways for us from DIX & HIBB’s updates are (1) the sporting goods category is proving robust and both are excited about new product launches in Q4 and into 2024. DIX stated on its conference call: “We are pleased with how our consumer is holding up within the sporting goods industry’. Hibbett said that “they do plan on spending more during the holidays, in particular, on footwear” and “Gen Z, as well as millennials, are definitely bullish and tend to spend more versus the older population”. (2) Both talked about a positive back-to-school period (Aug/Sept), with October sales weaker due to warmer weather. Footwear sales have been steady, with apparel more volatile. (3) Interestingly, there was very little questioning from analysts on shrink and stock levels, which suggests industry stock is back to more normalised levels, as expected by most industry players. Both Dicks’ Sporting and Hibbett raised FY guidance Dicks’ Sporting continues to take share in a fragmented market and beat on Q3 expectations. It raised its FY23 non-GAAP EPS outlook to $12.00-$12.60 (prev. $11.50-$12.30), incl. 20c for 53rd weeks. This is based on FY23 comp store sales +0.5% to +2.0% (prev. flat to +2.0%). According to management, this conservatively assumes a slowdown in Q4 comps QoQ as the consumer environment remains uncertain and Q4’s gross margin improvement YoY is expected to accelerate due to lower industry clearance and freight. Q3 sales +2.8% (Q2 +3.6%) with comps up 1.7% (Q3 1.8%), driven by a 1.1% increase in transactions and 0.6% in ATV. Q3 gross margin was up 88bps YoY (+78bps lower supply chain costs, merchandising margin +23bps offset by shrink +50bps). DIX still sees no trading down from its consumers and growth in all income demographics. (See overleaf)
JD Sports’ UK/European distribution strategy was driven by Group growth and Brexit. It became impractical to continue servicing Europe from Kingsway with a strategy to double UK & European capacity set out at a capital markets event in October 2021. More recently, a US strategy has been added. Currently, there are 3 key projects ongoing in UK, Europe & US, which will deliver valuable efficiencies and improved service standards to the Group. Derby is now the UK’s dedicated online fulfilment warehouse and is due to fulfil most of JD’s UK online orders over peak 2023, having gone live pre-peak 2022. This will relieve pressure on Kingsway, which will just focus on UK stores once Heerlen is up and running in 2024. Heerlen, the opening of which is key to moving towards double-digit European margins, will be the Group’s primary European distribution centre, fulling store and ecommerce. It starts taking delivery of stock pre-Christmas 2023, will commence delivery to store early 2024, and online early 2025. This will reduce Brexit-related cost and replace the 3PL DC at Menan. North America has a 5-year strategy focused on upgrading to the latest automation technology and moving to an integrated logistics network servicing all its US fascias from 3 main distribution centres, rather than 3 centres servicing individual fascias. It also plans to add more capacity in Canada to support the growth. Next news: January trading update. Short term concerns over a US slowdown in particular are weighing on the shares. We believe the valuation (CY24E PE 8.9x) is very undemanding for a business well-positioned to deliver double-digit growth p.a. over the life of its 5 year ‘JD First’ strategy.
JD shares traded off sharply on the run into interims, closing at a low of 133p, 15% below the summers' highs of 157p. With full year guidance maintained and management seeking to put concerns on US trading to bed, the shares rallied back towards 147p. Since then, the shares have ebbed and flowed,
The evolution of the store formats suggests that these are companies to follow. Their new management teams are hands on, upgrading standards and their deep financial pockets could make life difficult for the competition if these stores roll out elsewhere. The UK consumer will likely have a few wobbles but, in our view, these three names look very insulated from external pain. PLEASE CLICK BELOW TO WATCH OUR VIDEO
JD Sports Fashion^ (JD, Buy at 146p) - So understated, it is almost unfair
H1 results in line with expectations, full year re-iterated Today JD reported H1 in line with market expectations and reiterated its full year profit guidance. This was very encouraging, particularly the robust commentary around JD''s US performance, given the struggles by some of its peers. The presentation filled in some details, for example discussing shrinkage, as well as updating on the growth strategy. After today we see consensus forecasts remaining unchanged but see plenty of scope for the stock''s multiple to re-rate. We reiterate our Outperform rating. Key numbers from H1 results H1 Adjusted PBT: Adj PBT of GBP 373.5m was in line with expectations (company-compiled consensus GBP 371m, BNPP Exane GBP 367m). The company gave current trading for the start to H2 (August/September): organic sales growth at constant exchange rates of +10% in the first 7 weeks of H2 is ahead of the +6% that we model for the whole of H2. Management reiterated its full year Adj PBT guidance of GBP 1.04bn (53 week basis), in line with consensus. Key takeaways from the conference call As we detail overleaf, the key points from the call included: a discussion of the US market, including a surprisingly low impact from shrinkage; format development and growth strategy; relationships with the sporting brands; European margin potential; and share buybacks. Re-iterate Outperform rating, target price GBp 200 The shares have enjoyed a relief rally today, primarily on the robust performance of the US division and the reiterated full year profit guidance. We expect consensus forecasts to remain unchanged, but the stock trades on a single digit P/E multiple (with nearly 20% of the market cap in net cash) which we view as too low. We see plenty more scope for the stock to re-rate, and our TP of GBp 200 would imply a forward multiple of only 12x.
1H24 Group PBT of £373.5m (-2.6% YoY) was in-line with company compiled consensus of £371m & guidance. Management guided to a return to a more historic 1H:2H split of 35%:65% and that 1H PBT would be slightly down YoY. 1H Group sales were up 8% with organic growth (ex the impact of non-core divestments) up 12%. Standout performance was Europe where organic growth was +27%, with Asia +26%, North America +14% and the UK +8%. Current trading for the last 7 weeks in-line with management’s expectations. At constant FX, Group organic sales were up 10%. Reassuringly, the US has returned to growth after a strong Back-to-School season. Revenues rebounded in July (up high single digit) with August/Sept up decent double digit, having been down high single digit in June, which has turned out to be an aberration. Good 1H organic growth, in the range of 13%-17%, was delivered across all 3 businesses (Finish Line/JD, DTLR). FY24 guidance reiterated. Management expects headline FY24 Group PBT at current FX rate to be line with current market consensus of £1.04bn. We have maintained our forecasts but increased our FY24E DPS to 0.9p as mgmt. expects to return to a 1/3 H1:2/3 H2 FY DPS split. It declared a 0.3p 1H DPS. JD Brand First strategy very much on track with over 200 new JD stores due to open in FY24 (1H opened net 83 with 17 being conversions) and it signed its 1st franchise agreement. Its new European distribution centre is on track and JD plans to launch a new loyalty card in the UK in October. This will be rolled out in October in the UK and next year in Europe. Undemanding valuation (CY24 PE 8.1x) does not reflect how well JD is positioned to deliver double-digit growth per annum over its 5 year plan.
JD Sports Fashion^ (JD, Buy at 133p) - Interim results beat; FY24F guidance reiterated
We make no changes to headline forecasts today, and the shape of the 1H should please investors and silence the bears. We have never doubted that JD was strategically and tactically spot on in all its markets: holding profit guidance in difficult environments like these is highly impressive, and the shares deserve to go on a lengthy run from below 10x PE.
JD’s strategy has developed, and its underlying position is very strong with the brands and customers. External factors (UK and US consumer slowdowns) have not helped recent momentum, but while concerns over ‘over-stretching’ are worth discussing, ultimately we believe they are overplayed. JD is an expanding and highly cash-generative market leader in a lucrative industry. Not often is its like available on a sub-teen PE: Buy.
1H24 PBT expected to be down YoY in-line with guidance. At its June AGM, management reiterated its view that trading was in-line with the then consensus FY24 PBT of £1.04bn and that the profit phasing between 1H:2H would be normalised with 1H c.35% of FY PBT. We forecast a 3% decline in 1H PBT to £372m. The back end weighted nature of JD’s opening programme means profits will be more 2H weighted. Also, by 2H, JD’s margins should benefit from annualising the higher promotional activity from elevated stock levels in 2H23 and October’s wage increase. Derby DC costs are more 1H weighted and there will be no stock clearance costs in 2H from closing South Korea in 1H24. Focus will be on the US performance, particularly after both DICK’S Sporting Goods (NYSE DKS) and Foot Locker (NYSE FL) cut earnings last week, by 6% and 35% respectively, although for different reasons. DICK’S was cost driven, not sales driven, impacted by shrink and the proactive decision to clear predominantly outdoor stock, a category JD does not compete in. Otherwise, we thought DICK’S call was upbeat on future industry dynamics and sustainability of double-digit margins. Foot Locker’s downgrade was due to weaker sales/higher cost from shrink and discounting to clear excess stock (see pg.2 for more detail) and it continues to underperform as the business resets in FY23. Current trading/stock levels will also be of interest, to see whether JD has seen a good start to the key US back-to-school season (DICK’S was upbeat, as others have been) and whether the 1H resilience in the UK/Europe/Asia continued. We expect JD’s inventory levels to be in good shape as management confirmed back in June and January that there were no issues. We expect previous guidance to be confirmed with risk of a downgrade very limited, in our view. The Group benefits from having a more geographically diverse earnings stream (FY23 Sports Fashion EBIT split UK 40%/US 37%/Europe 18%/Asia 7%) than its US peers. JD had already Continued overleaf
Those at the helm of executing JD's US trading strategy cannot have an easy job right now. Aiming to balance market share with margins in an intense promo environment, whilst mindful of JD's own elevated stock cover and needing to protect their brand building ambitions.Whilst themes from US peers w
JD^ (JD, Buy at 141p) -
Initial Equity Trading Comments - 23 August 2023
JD/ NWF WYN
Meeting Notes - Aug 04 2023
JD/ IBST CTEC SDR INOV HTWS SRP DEVO CPI WPP CKN PAGE
Keeping the chain in Spain - acquisition of Iberian minority JD announced today that it would buy in the minorities of its subsidiary ISRG. This continues it on the journey of simplifying the business and increases the importance of the Continental European market for JD, in addition to its proposed acquisition of Courir France. We factor in both deals to our forecasts, increasing Adj. PBT by 1-3% and EPS by 5-8%. Trading on a CY24 P/E of 9.1x and EV/FCF 7% this remains one of our top picks in the sector. To buy or sell? Buy. JD Sports had previously said it might acquire 49.98% minorities of Iberian Sports Retail Group but that it might sell the non-JD retail banners - which include Sprinter and Sport Zone in Iberia and Aktiesport and Perry Sport in the Netherlands. However, today''s announcement confirms that it will acquire the minorities for EUR 500.1m and will retain these other sports banners. We think scale matters in this industry and estimate that the deal value is in line with JD''s current valuation. Active transfer window - upgrading forecasts We factor in the ISRG deal and also Courir France, which it will acquire for an enterprise value of EUR 520m in H2 subject to regulatory clearance. We also trim our tax rate expectation by c.1% to 26%. We increase FY Jan-24 EPS by 5% and Jan-25 EPS by 8%. We model JD to have over GBP 1bn of net cash at year end. Management has permission to repurchase up to 10% of its equity (GBP c.720m at the current share price), but we do not factor this in: the cash generation is back-end loaded and the new CFO joins in October, so any buyback seems more likely to be a 2024 event. King of kicks remains a top pick The market remains nervous of macro trends, particularly in the US (c.25% of the group), and some would also welcome a share buyback rather than accretion through minorities acquisition. However, in our view management is investing in attractive growth avenues and the stock is not priced for...
JD Sports Fashion^ (JD, Buy at 138p) - Remaining of Iberian Sports Retail acquired for
JD has announced its intention to acquire the remaining 49.98% in ISRG (Iberian Sporting Retail Group) from Balaiko Firaja Invest and Sonae Holdings for a total cash consideration of €500.1m. This will be funded from existing cash resources. JD sees an opportunity to continue developing Sprinter and Sport Zone in the Iberian Peninsula as a complementary fascia to the JD format. The deal is expected to complete in October post a General Meeting in September. Shareholder approval is required as the minority parties are regarded as related parties. Pentland (51.6% shareholding) has given an irrevocable undertaking to vote in favour of the deal together with the directors of JD Sports, and so the Group has irrevocable undertakings to vote in favour of the resolution of 51.6%. No antitrust filings will be necessary. No change to PBT forecast. ISRG is already fully consolidated. It delivered a PBT of €96.6m in FY23 (£83m at GBP/EUR 1.17). FY24E/FY25E EPS increases by 2%/3% as the minority will halve in FY24 and be fully eliminated in FY25. With JD funding the acquisition with cash, we now forecast IAS17 FY24E net cash of £1.4bn at year end, pre the completion of the Courir acquisition. This deal tidies up the ownership structure and JD retains complementary brands which gives the Group advantageous scale in the Iberian Peninsula. In addition, given Sprinter and Sport Zone focus on sporting goods, retaining the brands potentially gives the JD fascia another angle of growth in years to come. Valuation (CY24E PE c.10x) appears undemanding for such a high-quality, long-term growth story. FY24 was always a transitionary year, with 1H growth impacted by the costs of stepping up its opening programme and a normalising promotional environment. A slowdown in the US economy has not helped sentiment short term. However, JD’s geographically diverse earnings means it is capable of delivering double-digit growth for the foreseeable future.
Taking over the ‘other half’ of ISRG gives JD greater control of the growth in appealing European markets. There was progress last week with franchises starting in the Middle East, so JD is not dragging its feet as it grows across the world. We continue to believe that the global growth story here is materially undervalued, and reiterate our Buy on the shares, TP 250p.
JD’s first franchise agreement which is part of its ’JD brand first’ strategy JD Sports has announced a franchise agreement with GMG, based in Dubai. This is a ten-year agreement, which will see GMG open 50 stores under the JD fascia by 2028 in UAE, Saudi Arabia, Kuwait and Egypt. GMG has a diversified portfolio of more than 500 GMG Sports Stores, with its flagship brand being Sun and Sand Sports. This is JD Sports’ first franchise agreement, which management talked about as an avenue of opportunity for its Rest of the World division at its recent capital markets event in February. Then Regis Schultz, CEO, set out his ‘JD brand first’ strategy and announced a step-up in new store openings to 250-350 a year over the next five years, focused primarily on its existing US and European markets (see note ‘The next growth chapter’, published 8/2/23). The company talked about 150-250 of its 300-400 Rest of the World region store target coming from franchise. While high-returning, the impact of the deal is immaterial from a group perspective In the context of the group profitability, the impact of this deal is immaterial. A franchise is a high-returning income stream as virtually no capital is employed, but it is small in cash profit terms. A typical franchisee tends to pay c.5% of sales as a franchise fee. Undemanding valuation – Reiterate BUY While concern over a US slowdown overhangs sentiment towards the shares currently, we believe the valuation (CY24E PE 10x) looks undemanding for such a high-quality, long-term growth story which, in our view, is more than capable of returning to double-digit earnings growth for the foreseeable future. Management’s opening plans, if achieved, would imply JD net new store growth of 7.7% to 9.8% p.a. on a five-year CAGR basis, which we estimated would equate to group revenue growth of 12-14% p.a.. We reiterate BUY.
NIKE 4Q revenues ahead/earnings slightly below consensus. Inventory flat YoY (vols down), ahead of expectations Nike reported Q4 revenues up 5% (+8% CC) to $12.83bn vs cons £12.58bn. Direct led the way (stores +24%/digital +124%) with Q4 revenues +15% (+18% CC). Wholesale Q4 revenues were down 2% (+2% CC) with a moderation in growth planned as Nike focused on eliminating excess stock from its marketplace. Q4 earnings at $0.66 were marginally below consensus of $0.68, which was mainly due to higher opex, with gross margin down 140bps due to COGS inflation, higher freight/markdown and FX. Q4 North America sales grew 5% with EMEA up 3% (+7% CC). Encouragingly, Q4 inventory was flat YoY at $8.5bn (cons $8.8bn), units down double-digits and total market inventory (Nike + partners) down, according to management. FY24 – Tighter buy expected to translate into higher margins Nike FY24 guidance is for mid-single-digit revenue growth (cons +5.8%), which has a 4 points headwind from accelerated wholesale shipment (2022 orders slip into 2023) and excess stock liquidation. Gross margin is expected to be up 140 to 160 bps. Above-average margin improvement is expected by management, which should continue into 2025. The buy has been tightened. A low single-digit price increase is expected. Nike’s management is planning to improve the full-price mix (it expects it to improve to c.65%), which is a positive from an industry perspective in our view. Longer term, NIKE’s team is still targeting high 40%/high teens gross/EBIT margins and accepts the consumer will decide if its 60% Direct mix target is ever achieved (FY23 40% total direct & digital 24%), though the focus remains on driving Direct. There was little new from NIKE’s Q4/FY update from a JD perspective For the industry, it is encouraging that Nike has cleared its stock effectively, its supply chain is back to normal and it is focused on improving profitability. The strength of JD Sports’ relationship with Nike is evidenced by the fact it was called out again as a key strategic partner on the analyst call. In our view, JD’s proposition complements the brands’ own DTC strategy and gives the brands access to a different customer base. We believe having ramped up its opening programme, which will hold back growth in FY24, JD is well-positioned to deliver double-digit growth for the foreseeable future. BUY
JD^ (JD, Buy at 147p) - Positive growth momentum despite deceleration in sales; FY guidance reiterated
Initial Equity Trading Comments - 27 June 2023
JD Sports Fashion Plc CML Microsystems Plc
It cannot be beer and skittles in every geography, all the time. The US performance will probably catch the headlines but Europe and the UK are in rude health and have picked up any bottom-line slack. JD continues to outperform all of its major competitors and the shares discount far too much bad news. The shares remain at the top of our buy list.
Trading remains in-line with FY expectations (company compiled PBT consensus £1.04bn). As previously guided the 1H:2H trading split is expected to return to a more normalised level with c.35% of FY profits generated in 1H. May trading slowed as expected. Group organic sales grew c.8% at constant FX vs up more than 15% in the 1st 3 months. The US slowed from +25% in Q1 to mid-single digit as comps toughened YoY. Europe & Asia sales were up 20%, similar to 1Q, with the UK growth (up single digit) also similar to Q1. In June, the positive trends in UK, Europe & Asia continued (similar to Q1), though this has been partially offset by a further weakening in US, which has seen some softening in trade, consistent with other players. North America sales were down high single digit. In hindsight, management feels LY’s 1H stimulus comp effect may have continued for longer than they appreciated as on a 4 year basis (stripping out COVID), US sales have consistently been up YoY c.40% every month YTD. JD’s US inventory levels are normal & with little excess industry stock now, the wider promotional environment has normalised. FY24 opening programme on track with more than 150 new openings planned in FY24 (c.90 Finish Line conversions). A net 32 opened added YTD. No change to PBT forecast, though the mix has changed, resulting in a 0.7% FY24E EPS increase due to lower US minority. FY24E US EBIT cut by £25m, offset by a £25m increase in Europe/Asia EBIT. While retailers typically make more profits in the Christmas half, the back end weighted nature of JD’s opening programme means profits will be more 2H weighted. Also, by 2H, JD will have annualised the higher US promotional activity from elevated stock levels in 2H23, which should result in improved 2H US gross margin (vs down in 1H). M&A: Work is progressing to complete the Courir acquisition by the end of the 2023, with an update on ISRG future ownership due over the summer.
Lowered guidance from Foot Locker (N/R); mainly due to company-specific issues we believe Foot Locker has lowered guidance alongside weaker-than-expected Q1 sales. Total sales were down 11.4% with comps down 9.1%. North America comps were down 12.8% (Foot Locker fascia -5.5%) with Champs Sports a drag (-24.6%) as it is reset & EMEA comp sales were down 0.2% (Italy, Spain & France grew; UK & Germany down) with Foot Locker fascia +2.1%. Sales softened meaningfully in April (vs plan) post a weak tax refund season and has continued since. Management increased markdown levels at the end of Q1 to both drive demand and manage inventory and this will continue into Q2. FY24 was always going to be a difficult reset year for Foot Locker Inc after NIKE cut allocations last year and the Group is far too early into its new ‘Lace up’ strategy (announced 2 months ago) for it to impact on financials. In our view, years of underinvestment means there is much to fix at Foot Locker with the new strategy focused on broadening out ranges away from Nike, launching new formats, transforming the estate and building better CRM and digital capability. New FY24 guidance is EPS $2-£2.25 (prev $3.35-$3.65) based on sales comps -7.5% to -9% (prev -3.5% to -5%). Q2 comp are expected to be down high-single digit (prev: mid-single digit) with 2H comps down mid to high-single digit (low-single digit). Dynamics behind JD Sports very difference. It is a well-tuned machine and has just reported strong Q1 momentum In stark contrast, JD Sports Group has just delivered record profit in FY23 and a strong 1Q24 with organic total Group Q1 sales up 15% and the US up c20%. There is strong revenue momentum across all its key territories and we believe its ‘3 double’ 5 year financial targets, which imply double-digit growth p.a., seen achievable, as discussed in ‘The next growth chapter’ (published 8 Feb 2023). JD is c.40% smaller than Foot Locker and has a strategy which dovetails well with the global brands’ own goals. We see the dynamics behind JD Sports business as very different to Foot Locker. JD already has a well-invested business with a proven vibrant and unique lifestyle proposition which is laser-focused on under 25s. Finally, management said at its results earlier this week that JD does not have a stock issue, with cover similar to pre-COVID levels. Management views the promotional environment as returning to normal, rather than anything out of the ordinary.
JD Sports Fashion^ (JD, Buy at 170p) - Record FY results; FY24F guidance reiterated
Cheap shares – that the FY23 Prelims were strong is not a major surprise, but current trading at 15%+ is pleasing and an upgrade is always welcome. JD continues to be the preferred global partner for the brands and we believe the growth potential is not reflected in the shares. A clear Buy.
FY23 Group PBT of £991.2m (+4.7% YoY) was marginally ahead of January’s guidance for IFRS16 PBT at the top end of the then consensus range of £933m-£985m (FactSet consensus £986m; INVe £980m). The stand- out performance was the US in 2H, helped by much improved stock availability from the brands as the year progressed. The JD conversions, Shoe Palace and DTLR continue to deliver to expectations. JD Europe recovered strongly post pandemic which made up for a slightly weaker-than-expected UK performance. UK profits were held back by a full year business rates charge; higher than usual discounting from price matching; and increased IT expenses mainly associated with Derby DC investment. Good start to the year. Management is guiding to FY24 PBT in line with current consensus expectations of £1.03bn. For the 1st 13 weeks, total Group revenue growth in organic businesses was up more than 15% (c.4% space; 6-8% inflation), helped by a particularly weak US comp LY when US sales were down 25%. US comps get tougher as the year progresses, so revenue growth rate is expected to moderate in 2H. New store pipeline building nicely, though openings will be back-ended. Ramping up the new store opening to 250-350 JD Sports stores p.a. (including franchises) is the key building block behind the ‘JD brand first’ 5-year strategy. This is equivalent to space growth of c.8%-10% on a 5-year CAGR basis. FY24E/FY25E PBT forecasts unchanged reflecting guidance. Our DPS forecast doubles, reflecting a return to pre-COVID levels of cover in FY23. Valuation (CY23E/CY24E PE 13.4x/12x) looks undemanding for such a high-quality, long-term growth story which, in our view, is more than capable of delivering double-digit growth for the foreseeable future. We can still see upside risk to near-term forecasts. Reiterate BUY.
Initial Equity Trading Comments - 11 May 2023
JD/ ITV RR/ KYYWY SNUYF
JD SPORTS FASHION^ (JD., Buy at 164p) - JD welcomes new CFO, Dominic Platt
Dominic Platt announced as new CFO JD Sports has announced that Dominic Platt will take over as CFO from Neil Greenhalgh, who announced last October that he was leaving. Dominic has worked with Regis Schultz (CEO) previously at Darty, the French electrical retailer. Dominic is very experienced with a varied background in retail, global telecoms and financial services. Most recently, he was CFO of BGL Group, owner of Comparethemarket & a leading digital distributor of financial services. He is also a NED at N Brown Group. Next news: FY23 results due 17th May No surprises are expected from JD’s FY23 results as updated guidance was given back in January that IFRS16 PBT would be at the top end of the then consensus range of £933m to £985m. We forecast 3% growth in PBT to £980m. 2H performance was stronger than 1H, helped by better stock availability, particularly in the US. We expect management to confirm FY24 guidance for ‘PBT just over £1bn’ (INVe £1,053m) based on a US$/£1.22 FX rate. Sterling has strengthened slightly since (spot $1.26) which would weight marginally on translated US profits, but we believe guidance could prove conservative given underlying momentum. Our FY24E forecast is based on flat UK EBIT YoY & 10% US EBIT growth driven by Finish Line conversions, higher apparel mix and Shoe Zone/DTLR growth. Focus will be on current trading to see how resilient the UK has been and if the US economic slowdown has had any impact. Anecdotal comments from others suggests JD is likely to have had a solid start to the year. We are also looking for an update on progress in stepping up the rate of new opening and how FY24’s opening programme, which is expected to be back ended, is looking.. Undemanding valuation (CY24E PE 11.2x) as we believe the Group is capable of delivering double-digit growth p.a Recently appointed CEO, Mr Schultz, spelt out the JD brand’s 5-year growth opportunity at February’s capital markets event and set out financial targets (key ones are double-digit revenue growth/double-digit PBT margin), which in our view are achievable. A material step-up in JD new store openings to 250-350 units p.a was announced, which, if achieved, could equate to JD brand revenue CAGR of low/mid-teens over the five-year period. This is not reflected in the current valuation in our view.
JD Sports Fashion^ (JD, Buy at 163p) - Acquisition of Courir for
More to follow – JD is keen to continue its expansion into most of its current territories and Courir fits the bill. The balance sheet is of course very strong and we expect more of the same. With the Courir news comes an update on ISRG, where there will be some change in ownership structure in time. The Prelims are also confirmed for 17 May. We expect them to showcase a strong FY23 and a good start to FY24.
Proposed acquisition of Courir for an enterprise value of €520m from private equity Equistone Partners. Completion is dependent on receipt of merger control approval from the European Commission and is expected to complete in 2H. The cash cost will be €325m, with net debt of €195m expected to be refinanced. For the 52 weeks ending 31 December 2022, Courir had consolidated revenues of €609.8m, EBITDA of €63m and EBIT of €47.4m. This equated to a reasonable historic EV/EBITDA 8.3x. Courir operates 313 stores across 6 countries (see page 2) with its main exposure being in France (191 directly owned stores + 66 affiliate stores) where the Group already has 115 JD stores. Courir is regarded as a more female friendly offer which complements the JD brand. Courir is expected to be run autonomously from JD’s French operations, with the Courir brand retained as well as its operational infrastructure. Discussions over the future ownership of ISRG has been triggered by the minority owners of the Iberian Sports Retail Group. Balaiko Firaja Invest (the Segarra family) and Sonae collectively own 49.98%. There are 3 possible outcomes, with a clearer view on the likely outcome in the summer. The 3 outcomes are 1) The Group could acquire the remaining minority; 2) The minority parties buy the Group’s 50.02% holding of ISRG and the Group simultaneously acquires the Minority parties’ interest in JD across Iberia; 3) No change in ownership structure. We illustrate overleaf (pages 2 and 3) an estimate of the P&L and cash impact of options 1 and 2. Buyout of the remaining 20% German minority has been announced. This deal will have a de minimis impact on earnings given low German profitability. No change to forecasts at the moment until Courir completes and the outcome of ISRG talks are clearer. Next news – FY23 results on 17th May.
As inventory levels and gross margin pressures persist, sportswear companies are adopting different strategies for 2023. Hibbett will focus on profitability, while Puma will go after sales growth. Retailers like Dick's and JD Sports outperformed smaller retailers like Hibbett in 2022 and are expected to gain market shares. adidas' underperformance in 2022 contrasts with Puma's growth, as the company faces a year of reset in 2023. The sportswear sector is likely to remain promotional, but JD Sports is relatively insulated thanks to its lower sales mix participation in apparel in the US. In our view, JD Sports' superior product allocation and focus on customer experience make it a strong player in the competitive market. BUY
Sportswear retailers and brands are adopting different strategies in response to the volatile consumer environment. Puma plans to prioritise market share gains, even if it comes at the expense of profitability, while Hibbett is focusing on cost savings following a disappointing performance. Gross margins are likely to remain under pressure in the sportswear marketplace in CY23F due to high promotional activity, but companies can take advantage of some tailwinds, such as low unemployment and supply chain issues easing. Given its strong balance sheet, we continue to see JD as a leading player capable of taking up market shares. BUY
Improved visibility on the JD brand-growth runway. Mr Schultz, appointed CEO in September, set out a ‘JD brand first’ five-year growth strategy and painted a picture of self-funded, sustainable double-digit revenue growth on average over the five-year period, which will come at no cost to profitability. Financial targets seem achievable, in our view, with double-digit revenue growth and double-digit PBT margin guidance being the main ones. Material step-up in JD new store openings with plans for 250-350 JD stores p.a. (including franchises), primarily focused on its existing US and Europe markets. Management gave store target ranges by region which, if achieved, would imply JD net new store growth of 7.7% to 9.8% p.a. on a five-year CAGR basis. Our scenario analysis, which takes into consideration LFL growth, suggests this space growth is equivalent to a JD brand revenue CAGR of 13.4% to 15.2%. We estimate this would equate to Group revenue growth of c.12-14% p.a., allowing for a slower growth rate from the rest of the Group. Less was said on the other three pillars of the strategy, on which we expect to hear more at a later date. While there are likely to be further disposals, another growth angle will be the ‘complementary concepts’, which include Shoe Palace/DTLR (US), ISRG (Iberia), Size? and Go Outdoors. The strategy also includes becoming a best-in-class omnichannel player, driving the JD brand digitally and building on its strong brand partnerships. We upgrade FY25E PBT by 4.2% to reflect the step-up in growth plans. FY24 guidance is unchanged as it will take time to ramp up the opening programme. Valuation (CY23E/CY24E PE 14.4x/12.8x) looks undemanding for a business that we believe is capable of delivering double-digit growth for the foreseeable future and where we still see upside risk to our forecasts. BUY reiterated.
JD is focusing on physical retail to complement brands' primarily online direct-to-consumer strategy. The recent CEO presentation at the Tate Modern outlined a plan for profitable growth through investment in stores, M&A, and possibly share buybacks. Half of new stores will come from converting Finish Line locations in the US, while the rest will expand JD's reach in under-penetrated European countries through both new store openings and acquisitions. In our view, the 5-year plan offers significant upside potential, given JD's proven ability to deliver results and with its shares trading on a FY24F EV/EBITDA of 6x and a FCF yield of 11%. BUY
Cheap shares – Even on a short-term canvas the shares appear cheap: the CMD showcased just why JD is such a formidable machine, and the evolution of the management team has been smooth. Delivery of today’s roadmap and targets would easily mean a multiple of today’s share price.
A compelling growth strategy focused on accelerating the growth of the JD brand globally JD Sports held a successful capital markets event yesterday where Regis Schultz, who was appointed CEO in September 2022, set out a 5 year growth strategy which rightly focuses on accelerating the growth of the JD Brand globally. This is based on 4 pillars: 1) JD brand first; 2) Complementary concepts which covers the growth of Shoe Palace and DTLR (US community brands), IRSG (Sprinter) in Iberia, Go Outdoors (UK), Size?/Footpatrol (Early adopter concepts) as well as developing a better offer for women, for example; 3) Beyond Physical Retail which covers improving its online service proposition to best in class and creating a proper omni-channel business; 4) People, Partnerships and communities: This is about developing music and gaming partnerships via the app; developing a loyalty card programme in the UK and Europe; working closely with its brand partners such as NIKE. Financial targets seem achievable. Plenty of space to go after with US and Europe the key growth drivers There are 4 financial targets: 1) Double digit revenue growth on average; 2) Double digit market share; 3) Double digit operating margin at PBT line (FY23E 10.2%); 4) cash generation of £1bn p.a. to fund capex of £500m-£600m p.a.. JD’s expansion plans are focused on the US and Europe with plans for 250-350 JD stores p.a.. Growth is mainly organic driven, though management does still have an appetite for meaningful acquisitions. There is a longer-term opportunity to build scale in Asia (ex-China) and eventually think about LATAM. The Middle East and Africa are seen as franchise opportunities. Valuation (CY24E PE 13x) undemanding for a high quality, sustainable double digit growth story, in our view JD Sports is already a well-tuned growth machine, having delivered material growth historically. Management did a great job at demonstrating the multiple growth and efficiency opportunities to go after. While it will take time to step-up the growth pipeline, with management’s guidance for FY24 unchanged, delivery of this strategy should drive upgrades to consensus in outer years (revenue growth 6-7% p.a. source: FactSet). With so much white space to go after in its existing markets, we view JD as a sustainable growth story, more than capable of delivering teens growth per annum for the foreseeable future.
The JD success story in the US continues. Trading there has been very strong of late and relationships with key brands are second to none. Badge flips will continue at a heightened pace and there may be white space to open into if neighbourhood store trials in NYC work. The US is only one part of the story though: JD continues to carry all before it and we expect to hear more on how CEO Regis Schultz plans to retain the momentum at the CMD on Thursday. We think there’s very little not to like about the JD story right now, apart from the valuation, which is far too low. Buy. Click on the image below to watch Jonathan describe the new Chicago flagship store.
All I want for Christmas is shoes JD Sports delivered a strong peak trading performance in all regions, with a notable acceleration in the US. Management now expects adjusted pre-tax profits in FY Jan-23 and FY Jan-24 to be around the one billion pounds mark, implying c.2-4% consensus upgrades. This comes despite an acceleration of digital investment which we think can charge the next level of growth for the JD brand. We raise our estimates materially and expect JD - one of our top picks- to kick on from here. Simply having a wonderful Christmas time JD sales growth in the 22 weeks of H2 to 31 December was ''more than 10%'' (we estimate c.+12%), accelerating from the initial six weeks of H2 +8%. Sales accelerated during December, which is good for full-price sales mix. We estimate the three-year sales stack growth in all regions was higher compared with the first half. Most notably, we estimate 22-week Yo3Y organic growth was steady in the UK at c.+36% (vs H1 +35%) but accelerated in North America to c.+34% (vs H1 +16%). Gift-wrapped consensus upgrades Management guided FY Jan-23 Adj PBT towards the top of the consensus range, implying a c.2% upgrade, and we raise our estimate from GBP 953m to GBP 980m. It also guided FY Jan-24 to ''just over'' GBP 1bn, which implies a c.4% consensus upgrade. We had been forecasting cautiously, but the strong three-year sales growth rate in H2 22/23 now supports our forecast of GBP 1,010m, comfortably making it the most profitable FTSE100 general retailer. New team kicking on New management has signalled a sharper focus on the JD brand and accelerated investment in digital and multichannel capabilities. We expect to hear more about these at its Capital Markets Day on 2 February. On our forecasts the stock (at 150p) trades on CY23 P/E 11.5x, or c.9x if we ex-out the GBP 1.6bn pre-lease net cash, compared with its mid/high-teen recent history, as we showed in What''s in store, 3 Jan. JD remains a top-pick for us, with...
Strong BUY – The dual curveball of management change and a lacking-confident consumer have both been dealt with emphatically and the forecast momentum has not dwindled. The shares have perked up a bit but that is just the start of the rerating: a sub-teens PE is great value in our view.
Trading ahead of expectation, with revenue growth in its organic businesses (ex DTLR, MIG and Greece acquisitions) strengthening in 2H. For the 22 weeks of 2H to 31 December, total revenue growth was ahead more than 10% (1H +5%), with the last 6 weeks sales up more than 20% (Black Friday included). Standout performance was the US which recovered strongly, delivering growth of over 20% (ex DTLR) in 2H to date (1H -9%). Better stock availability helped given 2H global supply chain issues resulted in a weak comp YoY. As expected, there was more discount in apparel YoY. The JD conversion programme is on track with 134 JD stores open in North America. Elsewhere, 1H growth rates were maintained, which was better than anticipated. In 1H, JD UK & ROI total sales were ahead 6%, Europe 26% and Asia 33%. The Group is on course to add c.100 new stores this year. FY23 guidance now for PBT at the top end of the consensus range of £933m to £985m (previously flat on FY22 PBT of £947m) vs company compiled consensus £958m/INVe £958m. FY24 guidance is for PBT just over £1bn vs consensus at £990m (INVe £1053m). We upgrade FY23E PBT by 1.7% to £980m and maintain FY24E PBT at £1,053m. We assume flat UK EBIT YoY as any increase in profits is expected to be offset by a step up investment in IT & distribution. Management is looking to accelerate organic store investment which is expected to be back ended with 60-70 JD’s planed for the US, Europe 70+ (inc 20 stores acquired in Italy) and c.10 in Asia. Capex is expected to be c.£500m as there is also material infrastructure investment. Valuation (CY23E PE 10.9x) is undemanding, in our view. It does not reflect JD’s strong global proposition nor the multitude of exciting long term growth opportunities available.
We expect JD’s trading update on Wednesday to show a solid performance, noting Nike’s positive print in December. Looking ahead, sports footwear remains a staple in consumers’ wardrobe, so the category will likely show resilience against the macro backdrop in 2023. The CMD in February could shed light on the digital strategy and capital allocation, considering the expected £2.5bn of cash on the balance sheet by FY24F. In our view, JD is one of the best players in the UK Retail sector, trading at an unjustifiable discount (4.8x FY24 EV/EBITDA). BUY.
Strong top-line revenue growth from NIKE shows robust consumer demand continues. FY revenue guidance raised NIKE’s Q2 Group revenues were up 17% (+27% CC) vs Q1 +4% (+10% CC), with NIKE direct sales +16% (+25% CC) and wholesale revenues +19% (+30% CC). Key wholesale partners are ‘seeing good market share growth’ as supply improves, having been starved of stock for 6-8 quarters. NIKE’s gross margin declined 300bps, reflecting higher markdown (particularly US) to liquidate inventory, unfavourable FX rates and elevated COSG costs, partially offset by single digit price rises in Q2. The better-than-expected Q2 meant NIKE raised its FY constant revenues guidance to low teens growth at constant FX vs low double digit previously. Gross margin still down 200-250bps (of which FX c.95bps). Wholesale 2H growth expected to be slower than Q2. Q2 was a soft comp and good demand meant a stronger pull forward of shipments into Q2 from Q3. We believe positive industry momentum bodes well for JD Sports to deliver on consensus FY expectations. NIKE’s N.America sales were up 30% (footwear +39% & apparel +14%). Footwear growth is of most importance to JD as apparel is less than 20% of US sales. EMEA total revenues grew 11% (+33% CC), with footwear +14% (+37% CC) & apparel up 7% (+28% CC). Positive news on apparel inventory and encouraging early results from Connected membership programme NIKE has made progress on reducing inventory, predominantly in apparel, with management saying the inventory peak is behind them. Clearance is in-line with Q1 plan. Total inventory dollar & units were down QoQ. In dollar terms, YoY growth in inventory value decelerated from 65% in Q1 to 54% in Q2. The spread in total inventory growth to revenue growth should narrow further in 2H as the future buy is tightened. Total US units were down low double-digit from Q1’s levels. Full price sales are strong with NIKE brand ASP up YoY despite higher discounting to clear inventory. NIKE is seeing good early results from scaling its Connected membership programme with its key wholesale partners Dicks, JD Sports, Zalando and Top Sports. NIKE’s team believes ‘it will make NIKE a better retailer and a better wholesale partner.’ Wholesale partners are finding ‘engaged members are driving improved traffic conversion and mutual profitability for them.’ We continue to regard JD Sports’ market valuation as undemanding, and not reflective of the strength of its market position or its future growth potential.
Tidying up the portfolio JD’s decision to divest of some of its non-core smaller businesses chimes with management’s comments that the group will become even more “laser-focussed” on global sports fashion. The deal itself is unspectacular: JD will receive £48m off Frasers Group for about £200m of sales and very little EBITDA, so the deal does not really move the P&L dial for either. But for JD it shows real intent that genuine diversification away from the sport fashion core is unlikely, and that may reassure some. Our guess is that recent trading has been strong (stores better than online), and that forecasts are at worst intact. Sub 10x PE is a gift. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com #Corporate client of Peel Hunt
General Retailers - Trading Comments - JD. JD Sports Fashion^ (JD., Buy at 99p) - CFO Neil Greenhalgh to step down next year
JD & NIKE launch Connected Partnership, a reward programme, in the UK today JD Sports has been selected by NIKE (N/R) as the first European retail Partner for its Connected Partnership. This is an integrated reward programme, which gives customers priority access to select NIKE member-exclusive product, experiences & offers when a customer links their JD and NIKE Membership accounts through the JD mobile app. The partnership starts today in the UK with access to member-only footwear & apparel, with experiences & events to come later. Eventually, the Partnership will be extended across key EMEA countries. Both NIKE and JD will use their technological & digital expertise to provide a differentiated proposition both in-store & online. Data on NIKE-only purchases will be shared and this will enable both to engage more effectively with their customers. To be the first European Partner to go live shows the closeness of JD’s relationship with NIKE. From NIKE’s perspective, this is another building block in its ambition to have customer visibility across all channels. NIKE’s first launched Connected Partnership with DICK’s Sporting Goods in the US (Nov 2021), added TOPSPORTS and Taicang in China and, last night, announced JD & Zalando will join in EMEA. NIKE’s CEO commented that ‘our partners are, and will remain, a vitally important part of our marketplace strategy. Partners enable us to serve consumers with expanded access, choice, and convenience.’ NIKE’s Q1 update showed strong demand ahead of plan, helped by improving availability JD commented on the period covered by NIKE’s Q1 (to end August) at its 1H results. NIKE Q1 revenues grew 4% YoY (+10% at constant currency) with double-digit currency-neutral growth in North America (+13%), EMEA (+17%), and APLA, partially offset by declines in Greater China (-13%). NIKE’s wholesale revenues increased 1% (+8% at constant currency) helped by improved inventory levels. In US, wholesale grew low double digit with strong growth from JD/Finish Line and Dicks according to NIKE’s management. NIKE’s Q2 guidance is for low double digit sales growth with a 9pps FX headwind. NIKE said that it continues to see strong consumer demand in US and EMEA helped by better availability but investors appear focused on the fact that NIKE has excess stock in North America to liquidate in Q2. We believe JD US can trade well through the key holiday period as NIKE said it will prioritise the flow of new product in Q2 to its strategic partners and NIKE Direct.
When the going gets tough . . . JD Sports Fashion continues to perform well on all fronts. Europe was a particular eye-catcher in the consensus-matching interim PBT of £383m printed this morning, but against tough comps the UK and US held up well. It is pleasing that current trading is strong (total sales up 8% so far in 2H) and that any concerns regarding the board structure are now firmly behind us. Forecasts are not changing this morning, which is fair enough given the wider macro situation. The shares do not reflect the strength of JD’s global position and its cash pile. On less than 10x PE, the shares are right at the top of our buy list. We reiterate our Buy. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
1H results at the top-end of management expectations, reporting a 13% fall in adjusted 1H23 PBT to £383.5m (1H22 £439.4m) versus INVe £379m driven by a return to historically more normal 1H:2H trading patterns and an expected fall in US profits (£130.4m vs 1H22 £245.5m) after last year’s fiscal stimulus cheques which were estimated to have contributed an exceptional £100m EBIT in 1H22. This was partially offset by a very strong recovery in Europe and Asia. UK EBIT was down 9% to £154.8m (£170.8m), despite sales up 6%, as full business rates returned, equating to an extra £20m. Strong start to 2H. In the 1st 6 weeks, total revenue growth in organic businesses (ex DTLR/MIG acquisitions) accelerated to 8%, from 5% in 1H. The US returned to growth (up c.10%), after tough 1H comps. Europe is up double digit & the UK just in positive territory after a soft August/early September. FY23 guidance maintained for flat adjusted PBT YoY vs FY22 PBT of £947m (INVe FY23E PBT £958m; FactSet consensus £960m) at constant FX. While 1H profits were at the top-end of management’s expectations and 2H has started well, management is conscious about the widespread macro-economic uncertainty and inflationary pressures ahead. We have left our forecast unchanged at the PBT level though have reshaped the divisional split. Growth strategy and opening plans very much on track. The team is pleased with the performance of recent acquisitions. Management continuing to expect to open a store a week in Europe and to have c.140 JD stores in the US (101 end of July) by year end. The shares trade on an undemanding valuation (CY23E 9.5x). In our view, this does not reflect the strength of JD’s global proposition nor the multitude of exciting long term growth opportunities available. The balance sheet is strong with forecast FY23E IAS17 net cash of c.£1.5bn available for acquisitions. We reiterate BUY.
Peter Cowgill’s services have been retained under an expected 3 year consultancy agreement Ahead of its 1H results on Thursday, the company has announced details of the agreement it has reached with Peter Cowgill, former Chairman and CEO, post his recent departure. The company will honour his 12 month notice period post 25 May and, prior to 25 May, it has paid his salary and contractual benefits with an appropriate annual bonus on a pro-rata basis, subject to usual performance conditions. Separately, Mr Cowgill will receive £3.5m over 2 years for a 2 year restrictive covenant which prevents him from working for a competitor and soliciting any of JD’s employees. In addition, a consultancy agreement for an expected 3 year period has been agreed for which Mr Cowgill will be paid £2m over the life of the agreement. We welcome this agreement as it means that recently appointed Andy Higginson (Chair) and Regis Schultz (CEO) will have ongoing access to Mr Cowgill’s unparalleled knowledge and valuable experience gained from successfully building JD over the last 18 years into the company it is today. 1H23 results due this Thursday 23 September As set out in our 1H23 Preview (published 5/9/2022), we are forecasting a 14% decline in 1H23 PBT to £379m (1H22 £451m), driven by a fall in US profits, which is partially offset by growth elsewhere. Management estimated that JD US benefitted last year from an exceptional one-off £100m EBIT as a result of the fiscal stimulus cheques. Focus will be on any comment on current trading, which we expect to be robust, and on FY23 guidance. Mid-July, management reiterated FY23 guidance of flat PBT YoY with FY22 PBT of £947m (INVe FY23E PBT £958m; Factset consensus £960m). This is at constant currency (c.$1.30) so the depreciation of sterling to current spot of $1.14 is likely to result in an addition translational FX benefit. The shares trade on a very undemanding valuation (CY23E 9.7x) with a disconnect, in our view, between the valuation, the strength of its global proposition and the multitude of exciting long term growth opportunities available to the Group. The balance sheet is strong with forecast FY23E IAS17 net cash of c.£1.5bn available for acquisitions. Reiterate Buy
In a Golden State We completed our tour of JD’s US fascia by spending some time looking at the Shoe Palace portfolio. The stores lived up to their reputation for being fun and bling, with high retail standards. Apparel is clearly now much more of a factor in the sales mix than before. We fluked seeing a new refit and this model is set to be rolled out (five new stores per year). This note also previews the interims (we expect PBT of £380m) and we discuss the new CEO and the strengths he brings to an already smooth-running machine. The shares have been sunk by the UK retail sell-off, but we believe this is a class business that investors should own. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com 35-page note Click below to watch our video #Corporate client of Peel Hunt
A return to historically more normal trading patterns, with 35% to 40% of FY profits generated in 1H We forecast a 14% decline in 1H23 PBT to £379m (1H22 £451m), due to a fall in US profits as JD US benefitted last year from an exceptional one-off £100m EBIT in 1H22 from the fiscal stimulus cheques, according to management. This year, profit generation is expected to return to historically more normal trading patterns with c.35% to 40% of FY profits generated in 1H. This implies an 1H23 PBT range of £335m to £383m on our FY23E PBT of £958m. Mid-July 2022, the company reported robust trading for the first 5 months, which we expected to have continued, with Group LFL sales (ex the key acquisitions of DTLR and MIG) up 5%. US sales were approaching flat YoY towards the end of the period. The UK was positive and the recovery in Europe continues, with sales up mid double-digit. Focus will be on outlook and development pipeline. Positive FX benefit should help underpin FY23 PBT guidance Management also reiterated FY23 guidance of flat PBT YoY with FY22 PBT of £947m (INVe FY23E PBT £958m; Factset consensus £960m). Guidance is based on constant FX (c.$1.30), so if USD spot rate remains around $1.15, there could be c.15% upside to our US FY23E EBIT forecast of £319m. Focus will be on the outlook and any evidence of a change in consumer spending patterns. In 2H, JD should benefit from better availability generally YoY, with Nike and Adidas both expecting their supply chains to be back to normal this autumn. Anecdotal evidence suggests that demand for footwear in the US over the key back-to-school period has been robust. We are also looking for confirmation that JD’s opening/project plans are on-track with management continuing to expect to open a store a week in Europe and to have c.140 JD stores in the US (103 in July) by the January year end. Risk to FY23 forecasts remains on the upside. Reiterate BUY The shares trade on a very undemanding valuation (CY22E PE 9.6x; CY23E 9.3x) with a disconnect in our view between valuation, the strength of its global proposition and the multitude of exciting long term growth opportunities available to the Group. The balance sheet is strong with forecast FY23E IAS17 net cash of c.£1.5bn available for acquisitions. Reiterate Buy.
Appointed Regis Schultz as CEO JD Sports has announced the appointment of Regis Schultz as CEO. He will join in September, at which time Kath Smith will resume her former role as Senior Independent director on the Board after a short transitionary position. Mr Schultz has a wealth of retail, international and digital experience as well as a strong track record of effecting transformational change via digitalisation and multi-channel growth strategies. He joins from Al-Futtaim Group where he has been President of Retail since 2019. Prior to that he was CEO of Monoprox and Darty, as well as holding senior positions at BUT and B&Q. Valuation very undemanding We believe the appointment of a new CEO should start to help restore investor confidence in the JD story. The group’s shares are trading on what we consider to be a very undemanding valuation (CY22 PE 10.4x; CY23E 10.0x) with a disconnect, in our view, between the market valuation and JD’s proven track record, the strength of its global proposition and the multitude of exciting long term growth opportunities available to it. We believe the increasingly challenging consumer environment is more than discounted and see material upside to the share price. Next news will be 1H results in mid-September (date yet to be confirmed), which we expect to show another solid performance. We forecast 1H23E PBT of £370m. Management has guided to an H1:H2 profit split, with H1 having c.35%-40% of FY PBT, more in-line with historic splits, which implies a £335m to £383m range on FY23 consensus. Management has already reported robust trading for the 1st 5 months of 1H, with total Group LFL sales up 5% (ex the key acquisitions of DTLR and MIG). Reiterate BUY.
Disposal of Footasylum in the UK for £37.5m to Aurelius Group’s private equity business. The disposal was in accordance with the CMA’s decision to prohibit its acquisition by JD. We believe the price achieved was reasonable given that JD was a ‘forced seller’. JD acquired Footasylum for £90m in 2019. No change to company’s FY23 underlying headline PBT guidance for FY23’s PBT to be flat YoY with FY22 PBT of £947m (INVe £958m; FactSet consensus £958m). The sales/profit of Footasylum, at just over £200m/£10m in FY22, are immaterial given the scale of the JD Group. No change to INVe PBT forecast, which looks firmly underpinned, though we have adjusted the divisional splits to reflect the disposal. Next news will be 1H results in mid-September, date yet to be confirmed. We forecast 1H23E PBT of £370m. Management guided to an H1:H2 profit split with H1 having c.35%-40% of FY PBT, more in-line with historic splits. This implies a range of £335m to £383m on FY23 consensus. Management has already reported robust trading for the 1st 5 months of 1H, with total Group LFL sales up 5% (ex the key acquisitions of DTLR and MIG). 1H gross margin is expected to be consistent with last year as promotional activity has been limited. Shares trade on a very undemanding valuation (CY22 PE 10.4x; CY23E 10.0x) with a disconnect, in our view, between the market valuation and JD’s proven track record, the strength of its global proposition and the multitude of exciting long term growth opportunities available to the Group. We believe the increasingly challenging consumer environment is more than discounted, while the appointment of a new CEO in the near future should help restore investor confidence in the story. We see material upside to the share price. BUY.
Start spreading the news JD continues to take the world by storm. In this note we explore the detail of the US business, where margins have raced up. Was FY22 a high watermark for profits here? We do not think so, and we visited a number of stores to help us explain why. The AGM update was positive and we take the chance to bring FY24/25E numbers from low end to near consensus (3% moves, US at the heart of the upgrades). Board concerns should soon be behind us (we believe Higginson is a great hire), and we do not fear recession: sports fashion tends to be resolute. There is nothing not to like about the shares on 10x PE currently: a strong Buy. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com 59-page note Click on the image below to listen to Jonathan discuss this note
No news is good news June’s group trading progress was in line with the rest of FY23 so far, and guidance is unchanged. The shape of trading has shifted a touch from the 1Q average: the US is now only slightly down (and it could have been better but for some launch stock shortages), with the UK in the black and Europe 15% ahead. We expect that there remains a degree of conservatism in guidance, which is only sensible given the consumer has its challenges ahead. The underlying picture is very rosy though and with the boardroom changes likely to be completed by Autumn, there are few reasons not to believe. A firm Buy in our view. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
No change to FY23 PBT guidance. While conscious of the macro backdrop, management has reiterated its FY23 underlying headline PBT guidance of flat PBT YoY with FY22 PBT of £947.32m (INVe FY23E PBT £958m; Factset consensus £953m). Trading is expected to return to its historic more normal trading patterns with c.35% to 40% of profits generated in 1H, which implies 1H22 PBT range of £334m to £381m on consensus FY PBT forecast. Robust trading continues for the first 5 months. Total Group LFL sales (ex the key acquisitions of DTLR and MIG) are up 5% YoY, in-line with the 4 months run rate. This implies positive UK growth, which is focused on recycling stores into larger space. The US is negative but on an improving trend (approaching flat) as it is ‘comp-ing’ the tail end of last year’s stimulus cheques. Europe is growing at mid double digit. 1H gross margin is expected to be consistent with last year as promotional activity has been limited. Availability continues to improve though not yet perfect, with the US most affected. This is expected to further improve in 2H, in-line with the commentary from Nike and Adidas that supply chains will be back to normal by the autumn. No change to INVe forecast. For FY23, we assume JD offsets £50m of last year’s one-off £100m profit benefit from the fiscal stimulus. We also assume a £10m improvement in UK EBIT YoY. Management is on-track with openings/project plans and continues to expect to open a store a week in Europe and to have c.140 JD stores in the US (currently 103). Rebadging continues to deliver 20% sales uplift. Shares trade on a very undemanding valuation (CY22E PE 11.2x; CY23E 10.8x) with a disconnect in our view between valuation, JD fundamental performance and attractive strategic opportunities.
Initial Trading Comment - 28 June
JD/ AZN WYN STVG SAVE OBD KP2
Last night Nike’s quarterly call flagged a strong consumer demand despite supply chain disruptions and rising inflation. So, conscious of the rapidly evolving consumer environment, we conservatively set our estimates in line with guidance but see JD as well-positioned for a resilient FY23F. Indeed, H2 will represent the true test for the business: we expect a continuation of trading trends seen in H1, as comps soften, and profitability to be supported by the market consolidation in the US. Trading at only 4x CY22F EV/EBITDA and with reinforced corporate governance in place, we reiterate our BUY rating.
Nike Q4 earnings beat consensus expectations. Guiding to low double-digit FY23 Group revenue growth With JD releasing its FY22 results last week, its 4 month current trading statement and FY23 guidance covered Nike’s Q4 reporting period to the end of May. Nike (N/R) reported Q4 EPS of $0.9/s, better than FactSet consensus of $0.8. Q4 Nike Inc reported sales were down 1%, or up +3% at constant currency (the Group reported Q3 sales +5%/CC +8%) with DTC +7% (+11% CC) and Wholesale down 7% (-3% CC). Wholesale was impacted disproportionately by recent supply shortages from when COVID hit production in Vietnam last year. Nike believes it is well-positioned for growth in FY23, despite China likely to continue weighing on performance, given its brand strength, exciting product pipeline, normalising inventory levels, and better availability. Management is guiding to FY23 Group revenue growth of low double digit at constant currency with 400bps FX headwind. In Q1, real dollar revenues are expected to be flat/slightly up flat due to COVID disruptions in China and an over 500bps FX headwind. Nike’s management is planning for mid-single digit price increases and anticipating a more normalise promotional environment in FY23. Its full price realisation rate has been over 70% in 3 of its geographies last year, due to supply constraints, whereas its long-term goal was a 65% rate. Nike also expect its Wholesale channel to return to growth in FY23. Nike’s guidance underpins JD’s forecast assumptions JD’s results last week showed it has emerged from the pandemic with a step-change in earnings, positive momentum into FY23 and net cash of £1.2bn to fund future M&A. Nike’s FY23 guidance suggests consumer demand remains strong and FY23 should be another year of good growth for the sector, helped by innovation and more normalised supply. In our view, this bodes well for JD Sports’ growth prospects and underpins its own guidance, given the strength of its global proposition and multitude of exciting growth opportunities. Corporate governance concerns may well weigh on the shares until a new CEO is announced. However, we see material upside to valuation (CY22E PE 9.5x; CY23E 9.2x) with a disconnect, in our view, between valuation, JD’s fundamental performance and its attractive strategic opportunities. Reiterate BUY.
No devil at all in the detail The detail of the prelims is fascinating, showcasing a great year in our view but not a high watermark. UK margins are now back to their best, and in the US Finish Line exceeded its high points from past and present ownership. DTLR and Shoe Palace are interesting growth vehicles. Europe is recovering and has plenty of margin upside. Current trading conditions make FY23 hard to forecast but JD is not presently seeing the consumer downturn that others are in any part of its business: we have always believed that JD’s customers are resilient. Board issues may continue to be a burden to the shares but they look so cheap. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com, Ruben.Pathmanathan@peelhunt.com 8-page note
FY Jan-22 results in-line and a reassuring outlook This morning JD Sports published its much-delayed full year results, though the numbers themselves held little surprise with FY adj PBT in line with prior guidance and expectations, as was the GBP1.2bn net cash position. More importantly, management sees no material change in consumer demand since the May update and provided guidance for FY23 in line with market expectations. We raise our slightly more conservative EPS forecasts by 2-5%. Following today''s modest relief rally, the shares still only trade on c.9.5x CY22 PE, or 7.5x ex-cash. We reiterate our Outperform rating. Profits more than doubled versus pre-pandemic levels... GBP947m of adj PBT, closely in line with ''circa GBP940m'' prior guidance, is more than twice that achieved in FY Jan-20 (GBP439m). Although this includes contribution from several acquisitions, especially in the USA, it also included UK Sports Fashion achieving a record 19% pre-tax margin despite the impact of lockdowns in Q1 and the pre-existing US business'' margin rising 500bps. Gross margins, +220bps over the last two years, undoubtedly benefited from tight market inventory. However, JD is confident of retaining most gains, with key brands such as NIKE having significantly rationalised wholesale distribution, especially to discounters, over the last two years. ...and are set to be sustained in FY23 Flat year-on-year PBT guidance for FY Jan-23 incorporates the c.5% organic sales growth seen YTD and allows for flat performance in the remainder of the year - realistic in our view given softening US and UK comparatives and recovery potential in Europe and Asia. The company should also see modest acceleration in organic expansion in the year ahead, particularly in Europe but also in USA where its acquired banners have the strong support of key brand suppliers. Long term we think JD has the scope to double its footprint, as set out in: Key debates: a kickabout, 13...
Business as usual There is lots of ‘noise’ around JD, but the prelims/outlook show it is not affecting performance, which remains strong. FY22 was pre-announced and the numbers are thus more interesting than price sensitive (margins grew everywhere). Crucially, current sales growth in LFL businesses is 5%: good at home (in spite of the travails the rest of the sector is feeling), very good in Europe, and improving in the US (comps easing). Our forecasts are unchanged. Governance-wise, we expect to hear on a chair before a CEO, but today was all about showcasing that the business remains in great shape and the shares are very cheap. We reduce our TP from 280p to 250p and reiterate our Buy. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
FY22 results marginally higher than previously raised guidance. Reported FY22 adjusted PBT was £947.2m (+125% YoY) versus last guidance of ‘approximately £940m’. These are exceptional results, more than double pre-pandemic levels (FY20 PBT £438.8m), reflecting a proven growth strategy and a rebound post COVID in most regions except Asia. Group sales were up 38.8%, with 16% driven by acquisitions (DTLR in the USA, MIG in Poland, Deporvillage in Spain & Cosmos in Greece/Cyprus). Performance driven by exceptional US growth (EBIT +113.8% YoY), despite supply challenges in 2H, helped by market share gains from Finish Line/JD, the recent acquisitions of Shoe Palace and DTLR as well as favourable trading conditions helped by the US Government’s second round of stimulus cheques (sales from mid-March to mid-July 2021 +40%). Core UK market recovered well showing the enhanced flexibility built into its business model and strong online growth (c.30% penetration vs 22% in FY20). Nudge up FY23/FY24E PBT by 0.5%/0.2% to reflect small beat. Despite macro headwinds, management reiterated its FY23 guidance for ‘PBT in-line with FY22’. This assumes JD offsets £50m of last year’s one-off £100m profit benefit from US fiscal stimulus, helped by recent acquisitions, market share gains and a 2H improvement in the global supply chain issues. Trading for the first 4 months has been encouraging, with total sales in the Group’s LFL businesses up 5% (UK high single-digit, Europe strong double-digit & US improving on -20% as it comes to the end of last year’s fiscal stimulus comps. Shares trade on a very undemanding valuation (CY22E PE 8.6x; CY23E 8.3x) with a disconnect, in our view, between valuation, JD’s fundamental performance and attractive strategic opportunities. As investor confidence in the long-term growth story returns, we see material upside to the share price.
Peter Cowgill stepped down with immediate effect yesterday Helen Ashton (Interim Chair) and Neil Greenhalgh (CFO) hosted a conference call this morning to give background on yesterday’s announcement that Peter Cowgill (Executive Chair/CEO) was leaving with immediate effect. Helen is taking over as interim Chair (from NED and Chair of Audit & Risk Committee) with Kath Smith, NED and Senior Independent Director, becoming interim CEO. Kath has over 25 years’ sports and outdoor experience working with Adidas, Reebok and The North Face. Background to decision No one thing triggered Peter’s departure yesterday. The decision to split the Chair/CEO role was announced in July last year, so discussions have been ongoing. It became apparent to the Board that working out how Peter could split his role and fit into the organisational hierarchy was challenging with regards to how the reporting lines could work in practice. Recruitment of a new Chair/CEO is well progressed with news likely in the summer, as a dual search process was effectively being run. A governance review was also announced last year. There have been 2 incidents in public domain with CMA recently, with regards to Footasylum and replica football kits. JD has a new Board, which came together last year, and the Board wanted to ensure proper processes are in place so these governance/regulatory issues are avoided. The Group has grown very fast and needs more investment in internal compliance, legal, and risk management to tighten processes and procedures so can proactively manage risks going forward, rather than reactively. Effectively switching external cost to internal. An 18 month programme is in place to embed this into the culture, with the Board conscious not to impact the business operations. Undemanding valuation (CY22e PE 9.1x; CY23e PE 8.9x) for such a high quality growth company The call reassured that there are no financial control issues and results are still due in a couple of weeks. Peter’s legacy is having the vision, and creating the world-leading multi-channel retailer which JD Sports is today. He leaves behind a well-proven strategy with a driven, entrepreneurial, highly experienced management team. The recent trading update 2 weeks ago showed the strength of business momentum currently. We continue to believe that JD Sports is a high quality long term growth story, more than capable of delivering double-digit growth and with further acquisition potential (net cash c.£1.3bn).
Heavy is the head that wear the crown The ''King of Trainers'' shares are down 45% year-to-date, reflecting sector-wide consumer concerns, but also increased worries of disintermediation by key brand suppliers like Nike, as they prioritise Direct to Consumer growth. We revisit the five key debates we think will be the biggest driver of the shares, update forecasts for latest trading and currency and reconfirming our Outperform rating. 01 What''s the demand outlook? We revisit sneakers'' economic cyclicality and analyse peer track records through downturns. With 1/3rd US exposure the picture is fairly benign, albeit inflation is squeezing consumers. Inflation is driving ASP increases too though. Our forecasts allow for a 7% decline in JD''s LFL volumes to 2023. 02 Does JD face disintermediation risk? Foot Locker''s reduced access to Nike product has spooked investors. Our analysis of range benchmarking in UK and US confirms JD''s access to products, including exclusives, remains industry-leading. Our Survey of Shoppers, and app downloads, also show the value of JD''s reach. 03 What''s the expansion opportunity? Our benchmarking shows that the company has scope to double its sports fashion footprint across Europe, USA, Israel, and APAC, looking only at countries where JD has an established presence. 04 What''s the MandA opportunity? With GBP1.2bn net cash on the balance sheet JD has the potential to execute significant MandA. It also has a generally strong record of value-creation: we estimate its US acquisitions since 2018 are now delivering a pre-tax ROCE of close to 40%. 05 What''s JD worth? On our macro-cautious forecasts JD is on just 8.2x PE ex-cash. The shares are pricing in a terminal EBIT margin less than half the level achieved in FY Jan-22 and compare favourably with most peers.
JD anticipates it will be able to announce its FY22 results (ending 29 January) in early to mid-June. These results have been delayed from 12 April as the accountants wanted longer to complete their global audit process. Management has raised IFRS16 FY22 PBT guidance to c.£940m after finalising certain year-end accounting positions including the calculation of IFRS16. This compares to February’s guidance of at least £900m (Factset consensus £905m; INVe £903m). The IFRS16 adjustment to IAS17 PBT will be a c.£10m benefit (INVe £36m). The stronger underlying performance is from the UK & Europe. Q1 trading robust. For the 14 weeks to 7 May, total sales in the Group LFL businesses (ex DTLR, MIG, Deporvillage acquisitions) were more than 5% ahead YoY, most of which was volume despite a global shortfall in the supply of key footwear styles. Growth has fallen back from ‘more than 10%’ reported in February (for 22 weeks to 1 January) as JD is up against last year’s tough US stimulus cheques comps and the UK spike post stores reopening in April. Reassuring guidance on FY23. Despite a more challenging macro backdrop ahead, management continues to guide to FY23 PBT at least equal to FY22’s c.£940m (FactSet consensus £921m). There will be better visibility on underlying demand in 2H when JD is trading against truly comparable LFLs. Management has not taken into account any FX benefit YTD. We upgrade FY22E/FY23E by 3.5%/3.7% respectively to reflect the new guidance with the FY22E upgrade rolled forward into FY23E. We continue to see upside risk to medium term forecasts. JD Sports’ shares are trading on a very undemanding CY22E PE of 9.5x for a high quality long term growth story, in our view capable of delivering double-digit growth and with further acquisition potential (net cash c.£1.3bn).
A beacon in the dark Like one of its yellow signs on a gloomy evening, JD has shone brightly in 1Q when others have been fading, and we upgrade forecasts today (c.6%). Sales are ahead of last year (positive versus easier UK and Europe comps, resolute against tough US comps), but the key here is that lower availability of Nike has not been a major slowing factor. Tight cost control (in 1Q and planned) means that management has sufficient confidence to guide to a profit build on FY22E (which itself, we now learn, was above consensus). We take our £900m for this year to £955m. The shares were expecting bad news: this is a lovely surprise. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Pivot over Nike’s 3Q trading statement has pleased the market with good growth in the US and Europe (especially in apparel). Factories are now back to full capacity. This print will also bring JD back into investors’ minds, and it is interesting that Nike suggests that the changes (its “pivot”) in its wholesaler portfolio and strategy are now complete. Thus we categorically do not expect JD’s allocations of exclusive product from the big brands to fall, and we see the recent share price weakness as a very good buying opportunity: this is a market leader with the best sports retail brand in the world and it trades on just 12x PE. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com 2-page note
Positive read across to JD Sports on improving supply, strong demand and lower mark downs Nike beat Q3 expectations reporting Q3 EPS of 87c versus FactSet consensus at 71c. There had been downgrades ahead of the numbers reflecting well known inventory/supply chain issues last year, but Q3 results reflects Nike’s ability to navigate a volatile market helped by faster innovation and more flexible supply chain. According to management, ‘Marketplace demand continues to significantly exceed available inventory supply, with a healthy pull market across our geographies.’ Nike expects demand to remain strong in FY23, which supports our view that the athleisure market remains healthy. Nike Q3 Group revenues grew 5%, or 8% at constant FX, with North America revenues +9% and EMEA +13% at constant FX. Nike profitability benefitted from improvement in full price realisation and lower markdown throughout the marketplace in all geographies. We believe less discounting in the wider market should help underpin JD Sport’s ongoing profitability. Management commented that all Vietnam factories are fully open, operating in-line with pre-COVID volumes and production and forward demand plans. Inventory levels are expected to normalise in its Q4/1H23. Q3 wholesale revenues returned to growth, up +1% at constant FX. EMEA Wholesale revenue grew +10% led by stronger growth rates from its strategic accounts, which we believe bodes well for JD Sports European growth prospects in FY22. Nike reiterated how wholesale partners continue to play an important role in its marketplace strategy Having cut the number of wholesale accounts by more than 50% over the last 4 years, Nike discussed how it was moving on to the next phase with its new Wholesale partnership model. Management was adamant that its Wholesale partners continue to pay an integral role in its marketplace strategy, which will also drive healthy growth in its key Wholesale partners. Nike management explained how its partners help ‘authenticate the brand and then create the scale of distribution through a consistent consumer experience across a larger footprint.’ These comments should be reassuring and dispel concerns over disintermediation, and risk to JD’s supply, post Foot Lockers’ announcement that Nike was cutting its allocation from the autumn. Continued overleaf
Adidas’ (N/C) FY22 guidance appears quite upbeat and underpins JD Sports’ FY23 guidance, in our view Adidas’ management talked about ‘a great start in 2022’ and guided to FY22 currency neutral Group sales growth of between 11% and 13% (including Eur250m risk in Russia/CIS business from the war in Ukraine or c.1% of Group growth), which reflects mid-teens growth in EMEA and mid-to-high-teens growth in North America. Included in the guidance is an average mid-to-high single digit price increase in 2H. EMEA will be driven by ‘an expansion of our membership program and market share gains with key alliance accounts.’ The US is expected to be driven by growth in DTC and wholesale with management commenting that it will ‘significantly increase our market share with key alliance accounts in the market and look forward to continuing driving our basis in particular with Foot Locker, Dick's, JD, Kohl's and Nordstrom.’ After last year’s supply chain constraints and product shortages, Adidas’ management is expecting the situation to improve materially in Q1, and from Q2 for there to be no significant supply shortages. So, from a forecasting perspective, guidance is for Q1 revenue to be down mid-single-digits (supply shortage reducing growth by more than 10 percentage points) and a significant acceleration in Q2. Valuation very undemanding for long term growth story Post the recent market sell off and sector rotation, we believe JD Sports’ shares are trading on a very undemanding CY22E PE of 12.2x, for a business capable of delivering double-digit growth, with upside risk to forecasts, in our view, and over £1.3bn of net cash for further acquisitions. Adidas’ guidance yesterday for the year ahead appears quite upbeat and in our view underpins JD Sports’ guidance for flat growth FY23 on FY22. We note that Adidas still sees robust demand in the US despite last year’s fiscal stimulus. It will be interesting to hear what Nike (N/C) has to say on its Group FY22 guidance for mid-single digit revenue growth, when it issues its Q3 update on 21st March (May year end). Q3 revenue growth guidance was low single digit as Nike continues to be impacted by last year’s lost production in Vietnam. JD Sports is yet to issue a new date for its FY22 results (was to be on 12th April), which are delayed to give KPMG sufficient time to complete the audit.
Foot Locker’s warning on Friday appears company-specific Foot Locker (NR) shares were off c.30% on Friday following a warning on FY22 and FY23 profits. The reasons cited were tough comps from 2021’s fiscal stimulus, news that Nike is cutting Foot Locker’s allocation from Q4 and Foot Lockers’ ongoing brand and category diversification strategy. Nike accounted for 65% of Foot Locker’s revenues in 4Q21 and management expects it to fall to less than 55% in 4Q22. By management’s own admission, it has relied on too few SKU’s over the last 2 years and on Nike and Jordan. Limited read-across to JD Sports in our view. Reiterate BUY Foot Locker’s comment may raise concern over Nike’s DTC strategy and risk of disintermediation. We believe Foot Locker’s warning is company-specific. Nike has always said it wants to grow wholesale revenues; just with fewer partners. We see Foot Locker as being squeezed in two places: 1) North America, where we suspect it has probably over indexed in launches for some time and its allocation is being impacted by JD Sports’ growth. JD is c.60% of Foot Locker’s size in the US; 2) Europe, where Foot Locker lacks dominance, differentiation and apparel, unlike JD Sports. Nike is busy rationalising wholesales partners in Europe this year, which we expect JD Sports to benefit from. JD Sports is strategically in a much stronger position than Foot Locker in our view. JD Sports is growing market share in multiple parts of the world with a differentiated and elevated format and a strategy which complements the Brands’ own strategies. In our view, Foot Locker has been slow to elevate its format and diversify into apparel (c.15%), preferring to return cash to shareholders rather than investing in defending its US position. The breadth of JD’s offer in brands and apparel (apparel c.50% in UK sales, over 35% in Europe and 20% US) means JD Sports is already in a much stronger position. JD has been elevating and broadening its proposition for over 10 years and has built the necessary skill set already. Finally, JD Sports raised FY22 guidance on 17th February and reiterated its expectation for flat profits FY23 on FY22. This was after Foot Locker heard the news on its allocation in January. JD Sports’ guidance already reflected the tough US fiscal stimulus comp (guided to £100m of FY22 profits one-off) and we believe would reflect its expected supply outlook.
Guidance raised to FY21 PBT of at least £900m from at least £875m in January. In the January’s update, total revenues for the 22 weeks to 1st January were up more than 10% in the Group’s like for like businesses. This positive performance has continued through to year end (end of January). The upside was mainly Europe where demand was more positive than management was expecting in January, when it was more cautious given the level of COVID restrictions in Europe, given that January is a big sale month. UK performance is still nicely positive with clothing outperforming footwear. The US market is tougher, as expected, given Nike’s supply challenges and tough comps from last year’s stimulus cheques. We have upgraded FY22E and FY23E PBT by c.3%. Management has maintained January’s guidance for flat profits YoY. It is cognisant of the inflationary headwinds and constrained supply among key brand partners while it estimated FY22 US EBIT benefitted by c.£100m from the government’s fiscal stimulus in 1H (Finish Line sales +40% mid-March to July). We assume a £50m decline in US EBIT YoY as underlying growth should partially offset this. Market valuation (CY22E PE 14.8x) is very undemanding for a business capable of delivering double-digit growth for the foreseeable future, with upside risk to forecasts and over £1.3bn of net cash for further acquisitions. We see multiple opportunities to leverage its established US & European growth platforms, backed by a highly profitable UK business. In addition, it is well progressed in building a longer-term Asian growth platform and we note that the first JD Store in Indonesia opened this week, adding another country. New data for FY results will be announced in due course. We would not read anything into the FY results delay, given the complexity of the Group, while it will allow JD to report on the outcome of the divestment of Footasylum.
Winter Warmer JD clearly enjoyed January, to the extent that FY22 forecasts are rising by 3% to £900m. There’s a similar upgrade to the year just starting and it is clear that the momentum persists here. The UK was to the fore of performance with apparel especially strong, and Europe (esp. Italy and Spain) has been good, too. The Prelims have been pushed back to further work on the carrying value of FootAsylum and to bring some new acquisitions into the accounting fold. The shares have been weak but we would expect them to respond well to the update: they are a clear Buy in our eyes. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Guidance increased to FY22 PBT of at least £900m, from £875m in January A strong end to the year with the positive performance seen over Christmas continuing into January. The upside was mainly Europe where demand was more positive than management was expecting when it last updated. Management was more cautious in January given the level of COVID restrictions in Europe, as January is a big sale month. UK performance is still nicely positive with clothing outperforming footwear. The US market is tougher, as expected, given Nike’s supply challenges and tough comps from last year’s stimulus cheques, as expected. Management has increased FY22E PBT guidance to at least £900m, from £875m previously, and maintains its flat year-on-year guidance for FY23. FY22 results delayed from the previously announced 12th April The complexity of the Group is such that JD Sports has announced it will delay its results to ensure that KPMG has sufficient time to complete its global audit procedure, and to allow the Group to report on the outcome of the divestment of Footasylum with greater certainty. We would not read anything into this given that there are plenty of examples of other listed companies having issues with completing audits on time. Forecasts and TP under review. Valuation undemanding The market valuation on the pre-upgraded forecast (CY22E PE 15.2x) is undemanding, in our view, and does not reflect JD’s strong cash generation nor its long-term growth opportunity. We believe JD is well positioned to deliver sustainable double-digit growth for the foreseeable future. Maintain Buy.
We reinitiate coverage of JD Sports Fashion (JD) with a BUY rating and a fair value estimate of 290p, suggesting a substantial upside potential. Despite supply chain disruptions, footwear is one of the least impacted retail segments, and JD continues to trade strongly thanks to one of the best product allocations in the sector. JD can pass through price increases without facing demand elasticity by leveraging its unique consumer connection. We see M&A as one of the main drivers of medium to long-term growth, as it allows JD to move into attractive spaces and meet consumer expectations. We regard JD as a best-in-class retailer with the right product in the right places, alongside an impressive logistics network that only benefits from the brands’ direct-to-consumer (DTC) strategies. BUY.
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Strong 2H-to-date sales drive 3-8% EPS upgrades This morning JD provided a trading update for the first 22 weeks of 2H, reporting sales in like-for-like businesses up more than 10% year-on-year, implying a high-teens organic increase on a two-year stack. Gross margins remain stable on the elevated prior year base. As such, JD guided to full year Adj. PBT of ''at least GBP 875m'', ahead of our prior GBP 828m expectation. We raise EPS forecasts 8% for FY Jan-22 and 3% for Jan-23 onwards, with the latter reflecting initial guidance of flat profits for the year ahead. Whilst potentially conservative, like management we recognise macro uncertainties and cost rebuild as likely drags. Our DCF-based target increases slightly to 245p but, with better upside elsewhere, and trading on 18x CY23 PE (16x ex-cash), we stay Neutral. Sales remain unconstrained by industry supply delays... Sales momentum has remained strong through 2H22, up c.+17% on a two-year organic basis on our estimates, compared with +15% in H1. As such it is clear JD''s sales have not been constrained by tight inventory in the sportswear market. We put this down to 1) the company''s ''strategic'' partner status with key brands like Nike and Adidas, 2) its access to upcoming and resurgent brands e.g. On Running, to which it can direct customer interest and 3) disproportionally strong growth in apparel ahead of footwear, where availability is better. As such, we see consumer demand rather than supply remaining the key driver of revenues into FY23. ...though initial guidance for FY Jan-23 is stable yoy, reflecting multiple head- and tailwinds In FY23 JD should benefit from the annualization of recent acquisitions (Deporvillage, Cosmos). Additionally there should, hopefully, be a full post-pandemic recovery in continental European and Asian operations. European profits were GBP c.50m lower than pre-pandemic in 1H22 alone, for instance. By contrast, though, JD estimates it has a GBP c.100m boost...
Here, there and everywhere JD continues to motor. Sales are comfortably ahead of last year (everywhere doing well but arguably Europe the eye-catcher) and it is a very material upgrade (for FY22E we go up by about 15%, consensus by about 8%, our FY23E number goes up 10%, consensus up 4%). The comparatives continue to get tougher but JD remains with great momentum and relationships with big brands stay in the ascendant, when the opposite is true elsewhere. We expect further growth both organically and by acquisition, and our admiration is undimmed. Buy. TP to 280p. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Down at the Peel Hunt Arms: A pint of Glühwein Some of our best conversations take place at the pub. This week, we discuss: the (ir)relevance of Plan B; the state of the sector and share prices as we exit 2021; prospects for 2022; and our top picks for 2022. We discuss Cineworld, Domino’s Pizza, Flutter, Hollywood Bowl, Loungers#, On The Beach#, Rank#, Revolution Bars#, SSP Group, Ten Entertainment#, The Gym Group# and Whitbread, among others. Douglas.Jack@peelhunt.com, Ivor.Jones@peelhunt.com To watch Douglas and Ivor down at the Peel Hunt Arms, please open the note and click on the image like the one below. #Corporate client of Peel Hunt
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Issuer Sponsored CLIPPER LOGISTICS+ (CLG, House stock at 715p) – Interim results to 31 October EAGLE EYE+ (EYE, House Stock, 620p) – Perks of the trade – AIR platform to power new Pret a Manger loyalty scheme ECHO ENERGY+ (ECHO, 0.5p, House Stock) – Q4 operational update. EPWIN+ (EPWN, House Stock, 107p) – Appointment of Independent NED ONTHEMARKET+ (OTMP, House Stock, 101p) – new website and brand FTSE 250 VOLUTION^ (FAN, Buy, 514p) – impressive organic growth reported in AGM trading statement FTSE SmallCap PORVAIR^ (PRV, Buy at 700p) – Pre-close trading update: revenue beat; EPS at upper-end of consensus Main Market DWF GROUP^ (DWF, Buy at 110p) – Interim results confirm a strong H1 and good operational progress AIM IDEAGEN^ (IDEA, Buy at 306p) – Oversubscribed placing raising £103.5m RENEW^ (RNWH, Buy at 802p) – FY results: 19% organic revenue growth; earnings in line Cross Sector UK RETAIL – MADE’s profit warning; B&M’s special dividend; JD Sports’ A- Rating for Climate Change; and others
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Down at the Peel Hunt Arms: A pint of good cheer Some of our best conversations take place in the pub. This week, we discuss: the relevance (or lack thereof) of the Omicron variant with Dr Miles Dixon; Omicron’s impact on hospitality and travel; valuations and anomalies in the freehold hospitality sector; and the need for transparent disclosure to compensate for IFRS 16’s many failings. We mention JD Wetherspoon, Loungers#, Marston’s#, SSP Group, The Gym Group# and Whitbread, among others. Douglas.Jack@peelhunt.com, Ivor.Jones@peelhunt.com To watch the video of Douglas and Ivor down at the Peel Hunt Arms, please click on the image below. #Corporate client of Peel Hunt
JD/ MARS SSPG GYM WTB LP0
JD’s Cosmos widens again JD Sports Fashion continues to press on with acquisitions, this time an 80% stake in Crete-based Cosmos Sport. It has 60 stores in Greece and Cyprus: the core fascia is Cosmos, which sells sporting goods/sports fashion. There are 19 Sneaker 10 stores, which sell more premium footwear. Cosmos should turn over €80m this year and make a single-digit EBITDA: similar deals have been struck at up to 10x. This is bang in line with JD’s strategy as Cosmos is market leader in Greece, and it opens the door to other territories too. No change to forecasts or TP. but JD remains firmly on the front foot. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Bolt-on acquisition based in Greece and Cyprus JD Sports has announced the acquisition of Cosmos Sports, the leading player in Greece and Cyprus. It is acquiring 80% of the company for an undisclosed sum, with the remaining 20% to be owned by the Tsiknakis family. Put and call options have been put in place to enable the future exit opportunity for the Tsiknakis family. The business was founded in 1982 by Fragiskos Tsiknakis who continues to be active in the business, though the day-to-day operations are run by his 3 sons. Cosmos operates 57 stores in Greece and Cyprus under various banners. The principal banner is Cosmos with 32 stores, which is an elevated sporting goods/lifestyle proposition with a developed apparel offer (c.40% of sales). The average store size is 4,000 sq.ft, which is similar to a UK JD Sports. There are also 10 stores under the Sneaker fascia, which is a more premium offer, as well as stores under the Slam Dunk and Sportsfactory Outlet and associated websites. The business generated revenues of €52m in the year ending 31 December 2020, with a gross margin of 41.6% and EBITDA of €6.9m according to its accounts. While Cosmos already has access to most of the major athleisure brands, it doesn’t have access to the full ranges and so will benefit from the scale of JD Sports, strength of brand relationships and access to central support and knowhow. In keeping with other acquisitions, we expect the Group to use Cosmos as a platform to launch the JD Sports format. Reiterate BUY JD Sports’ recent CMD highlighted the multiple angles of growth available and the Group continues to have significant long-term growth potential. It is well-positioned to deliver double-digit growth for the foreseeable future. We continue to believe there is upside risk to forecasts and the valuation (CY22E PE 20.3x) remains undemanding.
The secrets of their success We wrote a one-page note on the JD CMD last week, but too much good information was revealed for that to be anywhere near enough. So this note is a longer summary of an intense afternoon in which JD’s all-round skillsets were showcased. Its “secret sauce” has many ingredients: confident buying, skilled merchandising and marketing, and bullet-proof infrastructure all form the base upon which local success is founded. But arguably most crucial of all are the people, who sign in to the JD culture almost it seems from birth and “get” the need for a proximity to the core customer. It was impressive stuff, we thought. Buy. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com 19-page note
Show up. Be cool JD’s CMD showcased a group that has spent 40 years building a brand that now has few (if any) peers in the sports fashion world. But barely any of the presentation was backward-looking: management here knows that one sideways glance quickly becomes a backwards one and the desire to keep evolving is tangible. Yes there were flashy videos with beautiful and diverse influencers but away from the sexy side of JD, the real heart of the success is a data-based attention to detail and a development of key talent from within. The CMD didn’t reveal any news on trading, but showed supreme and justified self-confidence. Buy. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Overall, JD’s CMD gave great exposure to the broader management team and a comprehensive detailed run through on the Group by operating function and region. For us, what shone through every presentation was management’s disciplined analytical approach, laser focus on execution, agility and obsession on driving better returns. The speed at which the market is developing is such that the business is constantly evolving. With the JD core customer at the heart of the Group, we see a huge opportunity to grow the business geographically as well as the ability to selectively expand brand options and category adjacencies. This should reinforce its UK position and keep growth going. Entry into the US was a game changer, with Finish Line giving the Group scale as well as access to the largest athleisure market in the world. There is still much to go after with the integration of recent acquisitions (Shoe Palace + DTLR), improving returns by cross-fertilising excellence from one facia to the others, driving apparel and network expansion. JD Europe continues to have multiple exciting roll-out opportunities and we came away with the impression that ISRG, its sporting goods specialist, also has ambitious expansion plans. In Asia, the Group is fast building a strong platform for future long-term growth. Finally, Outdoor appears to have turned the corner and has the building blocks to develop a profitable business. JD Sports is the category destination in apparel and has an adaptable consumer-facing proposition. Its range of fascias gives it the ability to focus on early adopters (Footpatrol and Size!) as well as the more mass market via JD. The Group has built bandwidth and diversity with extensive brand, product and category access. The strength of its brand relationships are such that it gets exclusive/bespoke product, good allocations and full access to ranges. This enables JD to give its discerning customers powerful reasons why it is the destination of choice. We heard how marketing is focused on being everywhere in the customer journey and maximising JD’s relevance to the consumer by being authentic and aspirational. The company has detailed logistics and property strategies built around agility. We came away as excited as ever about JD’s long-term growth potential and impressed with management’s rigour as well as the depth of talent in the business. We continue to believe there is upside risk to forecasts and the valuation (CY22E PE 20.1x) remains undemanding for a business we believe is capable of delivering double-digit growth for the foreseeable future.
Short term supply issues to impact Nike in Q2 and Q3 NIKE (N/R) reported Q1 revenues +16% to $12.2bn (+12% constant FX) versus FactSet consensus of $12.47bn, falling short in US and EMEA specifically. NIKE digital grew 25% with owned stores +24% and wholesale +5%. The reason for the shortfall was production issues in Vietnam and Indonesia. NIKE lost 10 week of production in Vietnam, with the lockdown recently extended to 1 October. Indonesia has reopened. In addition, product from Asia is taking 80 days to deliver, twice as long as normal, resulting in lost sales. NIKE sources over half of its footwear and a third of its apparel from Vietnam. Supply chain issues and longer delivery lead times in North America and EMEA are expected to impact its Q2, with NIKE Group guidance now for flat revenue growth YoY. The impact of lost production is expected to be greatest in North America in Q3. China, with shorter lead times, is likely to feel the impact in Q2. For the rest of FY22, NIKE’s management expects strong marketplace demand to exceed available supply and that availability should improve heading into FY23. For JD Sports, supply constraints are a short term headache & should not impact its exciting longer term growth story JD Sports reported 1H results just last week. JD management would have been aware of the current supply situation and clearly stated the current challenges in the market are ‘manageable.’ Supporting this, in our view, NIKE management commented ‘we continue to see strong growth in our differentiated (wholesale) partners’. When asked about how product would be allocated between D2C and wholesale, NIKE management said they were ‘going to continue to focus on prioritizing our product availability for those locations where the consumer is shopping, and that will continue to be within NIKE's own channels and our most strategic wholesale partners.’ Indeed, NIKE management also stated ‘supply-related reductions will likely trigger an even greater acceleration in the transformation of the marketplace towards NIKE and our most important wholesale partners.’ We believe this is supportive for our positive investment thesis on JD Sports. Another positive for JD is that the industry pricing environment is expected to remains favourable. The shortage of product does mean H1’s benign promotional environment is expected to continue into H2, resulting in strong full price sales which should support a strong gross margin. In addition, NIKE has put through a low-single digit price rises in 2H.
Strong US momentum in particular drives H1 beat and 25-40% FY upgrades JD Sports reported very strong 1H22 results: adj PBT of GBP440m was well ahead of consensus'' GBP206m and over 3x that achieved two years ago (pre-pandemic), led by strength in both existing and newly acquired US operations. As such JD is rapidly delivering on our prior ''bull'' case for this important market, as we recently explored in detail in Bison versus Grizzly. Management also raised full year guidance, albeit by less than the H1 beat with what appear to be potentially conservative 2H assumptions. We raise EPS forecasts c.40% for FY Jan-22 and c.25% for outer years and our DCF-based target increases to 1,145p from 980p. Trading on 22x CY22 PE, we are reluctant to chase the shares here and we retain our Neutral rating. LFL sales 20% higher than pre-pandemic levels... We estimate c.17% MandA contribution to H1 sales so, given minimal net space contribution and a small net FX drag, implied LFL sales were up 35% on a one-year basis and c.25% versus 1H20 on our estimates. This includes 28% yoy growth in Finish Line/ US JD despite limited lockdown restrictions compared to UK and Europe regions in the prior year, albeit boosted by fiscal stimulus. ...with US PBT margin reaching 18% USA accounted for 55% of total group profits in H1, driven by strong demand and c.410bps increase in gross margin, together with initial contribution of DTLR and Shoe Palace. This was significantly aided by fiscal stimulus but nevertheless also points to rapid company improvement vs North American rivals. Notably, despite store closures for the first c.10 weeks of the year, UK profitability also exceeded pre-pandemic levels. However, profits in continental Europe were still GBP46m below 1H20 levels highlighting further recovery opportunity in FY Jan-23. Upgrading adj PBT to GBP817m and target price to 1,145p Management guided to ''at least GBP750m'' adj PBT for the full year, which appears is...
Best of the Best It’s a title we’ve had up our sleeves for years and now is the time to roll it out: today’s interims are worthy of every superlative in the thesaurus and the upgrade is beyond even the biggest bulls’ hopes. The USA has been at the heart of the strength, with stimulus cheques driving stellar LFL and lower promos sending gross margins up 500bps. But let’s not forget the UK’s showing: here, in-store LFL was up 30% (on 2019) for extended periods in the half. The quantum of our upgrade (one-third) is verging on the embarrassing and despite their recent strength the shares will surely continue their run. We increase our TP to 1,300p. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
An outstanding 1H performance, reporting pre-exceptional PBT of £439.7m, versus INVe £240m, driven by both the US and UK. All 3 US businesses, including the recently acquired Shoe Palace and DTLR (total 1H EBIT contribution £72.9m), capitalised on the favourable trading conditions helped by the second US fiscal stimulus and strong gross margin from lower discounting. The UK saw strong retention of sales through digital channels when its stores were closed in Q1, as well as pent-up demand on reopening. Elsewhere, JD Europe reported a loss, impacted by extra Brexit-related costs and store closures. Other European fascias and UK outdoor returned to profit. JD Asia grew strongly, driven by Australia, with other Asian territories impacted by the lack of Chinese travellers/COVID. FY22 IFRS16 PBT guidance raised c.36% to ‘at least £750m’ including repayment of furlough, compared to ‘at least £550m’ back in July. The upper end of the market range was £650m with FactSet consensus at £592m. New store investment picking up, with new JD stores open in Western Europe (21), Asia Pacific (4 Australia/2 Thailand). JD also now has 66 stores trading in the US, opening 7 new stores and converting 10 Finish Lines in H1. We upgrade IFRS16 FY22E/FY23E PBT by 36%/15% as summarised in Figure 1 (over), with the main drivers being the US and UK. We are conservatively assuming a decline in H2/H2 PBT given tough comps and higher supply chain costs, UK business rates and infrastructure investment (Derby and Heerlen). Our TP, based on mid 20s CY22E PE, rises to 1300p (prev 1170p). Undemanding valuation (CY22E PE 20.5x) given global growth opportunities & strong cash generation. JD is emerging strongly from the pandemic with a step change in earning. It looks well positioned to deliver double-digit growth for the foreseeable future via organic investment & acquisitions.
American Beauty? JD’s Interims on 14 September will, we believe, show a very strong 1H performance in the UK, and in particular the US. We know that stimulus cheques were put to use in stores like Finish Line in early Summer, and the latest evidence from its peers is that the momentum has continued in the US. In the UK, we expect that the early promise post restart 3 has persisted as well. Europe has been less rosy, with duties and slower post-Covid-19 bounce-backs, but in general this should be a strong set of group numbers, and the risk to FY forecasts remains to the upside. The balance sheet is healthy: we expect further share price strength. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Better-than-expected updates from peers suggest a strong JD performance is likely All eyes are expected to be on the US when JD Sports reports its 1H results to see how strong Finish Line/JD performances have been and how the recent Shoe Palace (acquired December) and DTLR (acquired mid-March) acquisitions are performing. Recent better-than-expected results from both Foot Locker and Dick’s Sporting Goods as well as Nike suggest US demand for athleisure has been strong, benefitting from Government stimulus, and all players suggest a positive H2 outlook. This bodes well for JD with upside risk to FY forecasts most likely to come from the US, in our view. The UK is likely to have delivered a robust performance versus FY20, despite H1 trading affected by store closures during lockdown 3 from the beginning of January to 12 April in England and Wales, with Scotland and Northern Ireland reopening at the end of April. European performance is expected to be the weakest, reflecting store closures, lower online penetration, and generally weaker footfall/demand. The acquisition of MIG in Central Europe (May) and Deporvillage in Spain (June) should benefit 2H. Forecasting 1H results with any accuracy is complicated by different trading patterns year-on-year, store closures and last year’s weak comps when most stores were closed from mid-March to mid-June followed by strong pent-up demand, particularly in the US. We forecast 1H22E IFRS 16 PBT of c.£240m with risk to our FY22E PBT of £558m on the upside (Factset FY22 PBT consensus £585m with top end £650m), in our view, given recent trading updates from other retailers. Reiterate BUY; strategic update due with CMD on 13th October Valuation (CY22E PE 22.9x) does not reflect cash generation or its growth prospects. We expect JD Sports to emerge strongly from the pandemic with a step change in earnings, helped by a number of recent acquisitions/historic investments. With more acquisitions set to come (net cash c.£500m and c.£1bn debt facility), we believe JD Sports is well positioned to continue its double-digit growth story for the foreseeable future. A CMD on 13 Oct will give investors the opportunity to hear from the wider management team when it provides a strategic update.
Exploring the US bull and bear cases Following the acquisition of Shoe Palace and DTLR, and a strong market performance, the US has grown to represent approximately one-third of JD''s group revenues and net profits. Extrapolating its home market success implies significant growth and margin potential ahead. However, JD is not the market leader and, whilst overall market prospects are attractive, changes such as shift to online and brands'' direct-to-consumer ambitions mean winning is not assured. We raise our target price to 965p (from 920p) and maintain a Neutral rating, but also explore both bull and bear cases. An attractive market but plenty of competition US sportswear has an attractive growth outlook. However, our analysis of market structure shows it is disproportionately dominated by Nike, whilst in multi-brand distribution JD''s market share trails peers. JD is present in multiple banners, which we profile including providing a sneak peek at some of the early findings from Exane''s proprietary US consumer survey. Foot Locker, but also sportswear brands'' own stores, are key competitors. Online, apparel and a space roll-out opportunity JD has multiple opportunities in the US: online sales mix, at c.5%, in recent acquisitions can be lifted substantially and apparel mix is much lower than in the UK. Both could lift gross margins and leverage costs to further lift healthy c.11% US EBIT margins. Beyond conversion of Finish Line stores to the more financially powerful JD banner, our State-level benchmarking also suggests further store roll-out potential. Still, with sportswear brands prioritising their own direct-to-consumer stores and online, JD will need to take share of a shrinking wholesale/ multibrand channel to grow. US opportunity and risks represent a 170p bull-bear valuation sensitivity Following the recent trading update, we increase forecasts materially for the current year but more modestly thereafter. Our outer year EPS...
DTLR transferred into US ‘Genesis Topco’ as intended at acquisition JD Group has acquired 98.6% of DTLR in the US for $504.4m ($495m pre stock adjustments) with the remaining 1.4% held by management in February 2021. As intended at the time of the acquisition, the Group has now transferred DTLR to Genesis Topco Inc, which holds JD’s other US businesses (Finish Line, JD Sports and Shoe Palace). Genesis Topco is 80% owned by the Group and 20% owned by the Mersho Brothers, who sold Shoe Palace to JD and still run it. The price Genesis is paying for DTLR is the same US$504.4m that JD Sports Fashion Group originally paid. In order to maintain its 20% holding in Genesis, the Mersho Brothers are investing their pro rata element of the equity consideration into Genesis, which is payable to the Group as part of the transfer. No impact on Group P&L We already assumed that DTLR would be transferred in Genesis with a 20% minority so there is no impact on our P&L forecast. From a Group cashflow perspective, given the financing of the DTLR deal was via the US debt facility and cash, the Group will receive c.$52m of cash back, which we had not assumed in our Group cashflow forecast. Reiterate BUY Last week’s AGM trading update confirmed that JD Sports was trading ahead of expectations, with in-store trade recovering post reopening in the UK and Europe and the US benefiting from the Government fiscal stimulus in March. We expect JD to resume its exciting growth story with a step change in earnings helped by past investments, recent and future acquisitions. Current valuation (CY22E PE 22x) does not reflect JD’s strong cash generation or its material growth opportunity, with risk to forecasts still weighted to the upside, in our view, assuming no further lockdowns. Next scheduled news: 1H21 results on 14th September.
AGM: Awesome Group Momentum JD’s AGM statement reflects a good start to FY22 and we are upgrading handsomely. The US is the heart of the upgrade: customers are happy to spend their stimulus cheques and momentum persists. In the UK the numbers are held back by possible furlough repayments but underlying sales are strong. Elsewhere it is an equally positive trading performance. It is a 16% upgrade today to FY22E, 10% to FY23E. In other news, JD will look to appoint a CEO in the next 12 months but Mr Cowgill has no plans at all to leave the company. The shares should continue to outperform and we reiterate our Buy rating. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Guiding to FY22 PBT of at least £550m (Factset consensus £529m) which includes the cost of potentially repaying £25m of furlough payments received in the current year. The decision on repayment will be deferred until there is certainty on both the full lifting of COVID restrictions and the consequence of any further lockdowns over next winter. We upgrade FY22E/FY23E IFRS16 PBT by 11.1%/5.9% to £558m/£684m, reflecting guidance, with the main driver being a stronger than expected US performance. Our TP rises to 1170p (prev 1100p) reflecting the upgrades. Virtually all stores are trading now, although there continue to be some temporary closures in parts of South East Asia. The UK benefitted from pent-up demand post reopening, reacting positively to JD’s more innovative and exciting product mix. Store footfall remains fragile, though online traffic is still elevated (c.30% of sales). Sales were up double digit on 2 years ago in April/May and single digit in June. US sales have benefitted positively from a second round of Government stimulus in March and were up decent double digit on 2019. There are now 60 JD fascia stores following the opening of 5 new stores and 6 badge flips from Finish Line this year. The plan is still to do 50 Finish Line badge flips. In Europe, when stores were closed earlier in the year, sales retention was ahead of lockdown#1, ie running at 60-70% of 2019. Governance: The Board has announced its intention to split the current role of Executive Chairman and CEO before the next AGM and is looking at the Board composition in light of Hampton-Alexander and Parker Reviews. Valuation (CY22E PE 20.8x) does not reflect JD’s strong cash generation nor a material growth opportunity in our view. We expect JD to resume its exciting growth story and emerge from the pandemic with a step change in earnings helped by recent acquisitions.
Spain’s Sports Village JD has won the race to acquire Deporvillage, a Catalonia-based pure-play sports specialist. This is not a JD-lookalike: over 50% of sales are in cycling, with the balance in areas such as trekking, triathlon and camping. It boosts JD’s presence in Iberia and also increases its credibility in participation sports. The multiple isn’t lowly (it was a dip for the line with private equity) but it is the going rate for a profitable pure play with strong growth credentials. We suspect that the underlying picture at JD remains strong: certainly the Nike update on Thursday suggested as much, and momentum remains here: an absolute core holding. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Re-opening high streets set JD on course for strong profit growth in FY Jan-22 Full year adjust PBT fell just 4% year-on-year, and indeed rose 28% yoy in the second half to the end of January. Admittedly this was aided by some government support and a little MandA, but also by strong organic sales growth and tight underlying control of costs. Guidance for FY Jan-22 implies 13-19% growth in adj PBT with further upside implicit in outer years when pandemic disruption no longer impacts store closures. We revise our own EPS forecasts 0 to -8% but, offset by higher long term margin prospects, our DCF-based target price increases slightly to 920p (from 885p). Trading on 24x CY22 PE we retain our Neutral rating. A strong second half, driven by USA in particular We estimate organic cFX sales rose c.7% in 2H (to end January) in the main Sports Fashion division, despite the impact of off and on lockdowns in UK and several European markets from November onwards, since very strong online sales were able to offset store closures. Gross margin in the division rose 100bps in the year, and 275bps in 2H. This was strongly driven by the US where better retail disciplines were combined with a tight and less promotional market. Full year US gross margins rose 370bps yoy. Much of the easy margin opportunities here have now been delivered but management effectively raised its mid-term ambition for EBIT margins for the region above the 10% previously targeted (and achieved this year). Remaining levers include more disciplined store appraisals, double-digit sales uplifts on ''JD'' banner rebadges and apparel mix. Confident outlook for the year ahead JD has guided adj PBT of GBP475-500m (versus our prior GBP494m, Visible Alpha consensus yesterday GBP470m). This was implicitly a GBP30-40m upgrade from the view given in January, driven by stronger online trading during the latest lockdown than originally hoped for. For the remainder of FY22 management has indicated...
A remarkable year in every sense The prelims showed that whilst external conditions were at times unplayable, JD dug in and now leaves the year unbowed in a stronger overall position. In FY21 the US was the jewel in the crown, with Europe less sparkly. PBT had been pretty much pre-announced but FY22 has clearly started well and we upgrade at the PBT level (although there’s no EPS upgrade on a technicality). As we leave Covid-19 behind us, JD is now in an enviable position, with strong relationships with the key brands and cash to spend on acquisitions as required. The roadmap into four digits of share price and beyond is clear to us. TP to 1,050p. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Reported FY21 PBT (IFRS 16) £421.3m, 3% ahead of January’s guidance for PBT of at least £400m (INVe £402m), which is a pleasing result given multiple periods of store closures. Unexpectedly, a 1.44p final DPS has been declared. Performance driven by exceptional US growth in part helped by the US Government stimulus. A further 37 Finish Line stores were converted to JD (c.20% revenue uplift on average vs 10%-15% in the early ones), taking total US JD stores to 49 at year-end. For the 6 weeks of ownership, Shoe Palace contributed EBIT of £13.9m. The UK performance was solid with Outdoors returning to profit in 2H following the restructuring of GoOutdoors. Net cash at year-end was £795m (net of £68.9m deferred Shoe Palace consideration) before the payment of £380m for acquisitions since year-end, and £125m of temporary benefits which should reverse in 1H. Management’s IFRS 16 FY22 PBT guidance is £475m-£500m, reflecting a difficult start to the year with store closures, a full year profit contribution from Shoe Palace and the acquisition of DTLR in March. At least 40 new European JD stores are planned, 10 US ones plus 50 further badge flips (Finish Line to JD). Upgrade FY22E/FY23E PBT by 5%/0%, reflecting the beat in FY21. This is offset by a higher tax rate as US earnings increase within the mix. FY22E/FY23E EPS increases by 0.7%/cut by 4%. Management is encouraged by trading year-to-date despite stores closures in a number of markets. Sales retention rates have been better with the UK c.90% (c.70% in lockdown 1) and Europe 80% (30-40% in lockdown 1). The US started the year with flattish LFL, with a stronger March as the stimulus cheques kick in. Valuation (CY22E PE 22.4x) does not reflect JD’s strong cash generation and growth opportunity. We see a great opportunity to leverage its established US & European growth platforms, backed by a highly profitable UK business.
Nike trading at pre-COVID levels, though it varies by region Nike’s Q3 performance to the end of February was impacted by COVID-19 disruptions, particularly in North America and EMEA. Group revenues +3% (down 1% at constant FX) with the standouts being Nike Digital +54% and China with revenues +42% at constant FX (2nd consecutive $2bn quarter). Nike’s owned and partner digital was over 35% of business in Q3. Group gross margin improved 130bps due to higher full-price sales and direct sales. Nike’s North America revenues declined 11% at constant FX, largely due to the global container shortages and US port congestion, which started in December and delayed Q3’s flow of inventory by more than 3 weeks. There have been supply shortages relative to continued strong marketplace demand, which also impacted the timing of wholesale shipments, according to Nike. Nike expects to capture this delayed revenue in its Q4. EMEA sales fell 9% at constant FX. Physical retail was impacted with c.45% of NIKE-owned stores closed for the last 2 months of Q3. This was partially offset by 60% growth in digital sales. Management said excess inventory in EMEA is manageable and lower than during the first lockdown. Inventory is expected to normalise by Q1 2022. Currently, c.65% of its EMEA stores are open or on reduced hours. Where stores are open, it is seeing strong comparable sales yoy. Nike Group guidance is for low to mid-teen growth for FY21 (raised from low teens at Q2), with Q4 revenues roughly 75% of the prior year. Gross margin is now expected to be up 75 bps yoy due to mix shift to digital, partially offset by higher logistics costs and higher mark-down in EMEA to clear stock. In FY22, management expects strong revenue growth, but will give specific guidance on its Q4 call. Read-across to JD: Positive – strong end demand from the consumer for athleisure JD has reported to the end of January so Nike provides colour on one extra month. We are encouraged that end demand remains strong and this included its strategic partners, according to Nike. Nike’s shipping issue appears to be more US-related although most UK retailers have had their own issues, exacerbated by Brexit. Nike’s management did comment that: ‘we will continue to prioritize inventory for our strategic partners and for NIKE Direct. And when we look at where marketplace inventory is today, it’s down high double-digits vs. where it was a year ago. And so there is strong demand for that inventory across our strategic partners and NIKE Direct, and we intend to continue to fulfil that demand in both of those locations’.
A relatively small acquisition with exposure to 9 Central European countries JD is starting to deploy the capital it recently raised, announcing a conditional agreement to acquire 60% of Marketing Investment Group S.A. (MIG) in Central and Eastern Europe. The other 40% is owned by two brothers, Andrzej and Zbigniew Grzaka. Future put and call options will be put in place. Based in Krakow, Poland, MIG operates 410 stores across 9 countries selling a wide range of sports fashion footwear, apparel and accessories from leading global brands primarily under the ‘Sizeer’ and ‘50 Style’ fascias. The stores average 2,000 sq.ft. in size with the bulk (323) of the stores in Poland. The next biggest country by store number is Romania (27), then Lithuania (17), Czech Republic (15) and Slovakia (9). Sizeer is a premium format, of which 28 are franchises, with ‘50 Style’ more discount. The price paid has not been disclosed (the acquisition is too small under Listing Rule 10), suggesting it was relatively small. In the year ended 31 January 2020, MIG generated revenues of approximately £200m with minimal profit. Potential to build profitability. Platform to roll the JD fascia out from The acquisition is small in Group terms, so we leave our forecasts unchanged as it is likely to take a year to positively impact profits. Like Finish Line, there is potential to grow profitability, particularly at the gross margin level (low 40s currently). This should be driven by better buying, lower discounting, broadening out the range (currently limited), growing apparel (c.15%) and improving the operating efficiencies by upgrading systems. Online is c.24% of sales. There is a good warehouse. Over time, we would expect some rationalisation of the portfolio. MIG is a good platform from which to launch the JD fascia in Central Europe, which is likely to focus on the main cities. Reiterate BUY. Risk to forecasts on upside As discussed in our recent note Moving up the order (15/2/21), JD Sports should emerge from the pandemic with a step change in earnings and strong momentum, helped by the number of recent acquisitions/historic investments, which underpin current consensus and suggest upside to forecasts. With more acquisitions set to come as management deploys the cash from its recent £464m equity raise, in our view, JD Sports is well positioned to continue its double-digit growth story for the foreseeable future. This is not reflected in the current valuation (CY22E PE 19.5x). Next news FY21 results – 13 April.
Pole Position JD is acquiring a 60% stake in the Krakow-based sports retailer MIG. It runs the Sizeer (206 stores, mini-JDs) and 50 Style (160 stores, value-based) chains across nine Eastern/Central European countries (the biggest by far is Poland). It’s a small deal: MIG made £10m of EBITDA to Jan 20, so it’s a start to the spending of the £400m raise but not a big dent in the firepower. It gives JD a foothold in interesting growth markets, and we would expect flagship stores to follow in big cities. JD continues to build its global presence, and we expect more deals ahead. Forecasts are underpinned and the shares are cheap for the growth prospect. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
JD has cemented its position in the largest athleisure market in the world. The recent US acquisitions of Shoe Palace and DTLR adds valuable scale and, together with Finish Line/JD Sports fascias, the combined US sales base of c.$3.3bn is now just over half the size of Foot Locker US. JD has a strong US platform from which to grow and take market share. All 4 fascias are distinctive and complementary in terms of geographical and demographics. JD could overtake Foot Locker as the No 1 multi-brand athleisure retailer globally in 2021, according to consensus estimates, helping to strengthen its relationships with the global brands even further. Forecast updates reflect the £464m equity raise, via a placing of 58.4m shares at 795p (6% placing). We make no change to FY21E. FY22E/FY23E PBT increase by c.0.5% & EPS decrease by c.5.5%. JD should emerge from the pandemic with a step change in earnings and strong momentum, helped by the number of acquisitions/historic investments, which underpin current consensus. We simplistically estimate ‘normalised EPS’ to be c.42p, by taking FY20 earnings, adjusting for losses the Group was carrying in FY20, improvement in US & Australia profitability during the pandemic, and acquisitions since. This figure does not include operational improvements, LFL growth and new space additions. Timing and type of future acquisitions unknown, but the Group has c.£500m of net cash on the balance sheet post deferred payments. If JD generated a pre-tax ROCE of 15%-20%, this could add EBIT of £75m-£100m. If it dipped into its c.£1bn global debt facility, the profit benefit could be higher. Valuation (CY22E PE 19.1x) does not reflect JD’s strong cash generation and growth opportunity. We see a great opportunity to leverage its established US & European growth platforms, backed by a highly profitable UK business.
JD/ MCRO SGE TBCG
Today Villa, tomorrow the World Not the words of Jack Grealish thankfully but a broad summary of where JD is right now. The deal to acquire DTLR Villa on the east coast makes perfect strategic sense and is a further high quality bolt-on to the ever-evolving US arm. The c.£400m raise gives JD even more firepower for further deals around the globe. The b/sheet is strong anyway but some deals need acquirers to move quickly and the bigger the war-chest the better. We expect entries into new countries but also other deals to bolster existing positions. The shares have loads of potential and they remain one of our top picks with a TP of 1,000p. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
Bolt-on acquisition of DTLR adds scale and is highly complementary to JD’s existing US businesses from a geographical perspective. DTLR is a Baltimore, Maryland based hyperlocal (street based) athletics and apparel streetwear retailer, operating from 247 stores across 19 states. The stores are principally in the north and east of the US. DTLR’s attractions include strong connections to the black urban community with 70% of locations on the street, which differs from Finish Line (mall-based), JD (more cities/metro) & Shoe Palace (more Latino/Hispanic). JD now has a powerful multi-lever US growth platform, in our view. Total cash consideration of $495m seems fair. This valuation (1x historic sales) is lower than the price paid for Shoe Palace (1.6x historic sales), which reflects its lower profitability and potential growth outlook (see Figure 1 overleaf). Management guides to store base growth of c.5% p.a. versus 10% at Shoe Palace. The business will be part of the US ownership structure so JD Sports plc will own 80% and there will be a 20% minority. On new numbers, the US is forecast to account for 40% of FY22E EBIT (IAS17 basis) and the UK c.50%. FY22E/FY23E PBT upgraded by c.3.5%. The deal is due to complete in Q1 2020. The upgrade is less at the EPS level (1%-1.5%) given the minority and higher interest. We assume a similar level of sales/EBIT for FY22E as reported for the 52 weeks to 1 Feb 2020 pre-COVID (see Figure 2). Valuation (CY22E PE 17.6x) is undemanding and unreflective of JD’s strong cash generation and future growth prospects. We expect JD to emerge strongly post pandemic and resume sustainable double-digit growth, supported by both DTLR and Shoe Palace. JD is an exciting international roll-out story with a great opportunity to leverage established growth platforms in the US and Europe, backed by its highly profitable UK market position. BUY.
A complementary hyperlocal chain located mainly in the north and east of the US JD Sports has announced the acquisition of 100% of DTLR Villa LLC, a Baltimore, Maryland based hyperlocal athletics and apparel streetwear retailer, which operates from 247 stores across 19 states. Stores are principally in the north and east of the US. The deal is subject to expiration or termination of the applicable waiting period under the HSR antitrust act with the deal anticipated to close during Q1 2021. The attractions of the business include its connection to the black urban community with 70% of locations on the street, which differs from Finish Line, which is mall-based. The stores are c.3,000 sq.ft in size with apparel c.20% of sales mix and the business has good brand relationships (Nike +Jordan c.60% of mix). The intention is to retain the DTLR fascia with current management running it. Total cash consideration $495m The total cash consideration is $495m, of which $100m is to be used to repay existing debt. The business is to be folded into the US ownership structure at a later date, rather than JD Sports plc directly owned as acquired, and so end up 80% owned directly by JD Sports plc with a 20% minority. In addition, the management of DTLR will reinvest a proportion of these proceeds back in and have a c.1.4% minority holding in DTLR. DTLR made EBITDA of $45.6m on sales of just under $500m in the 52 weeks to 1 February 2020. The store growth rate following consolidation is likely to be c.5%, according to management. An attractive, complementary business with attractive margins This is another attractive bolt-on acquisition in the US, which helps build scale in different locations to Finish Line. We continue to believe the valuation of JD Sports does not reflect the strength of its cash generation nor future growth prospects. Forecasts/TP are under review.
2H-to-date trading well ahead of expectations but outer year COVID cuts Organic sales rose 5% in the first 22 weeks of 2H Jan-21, despite second wave lockdowns in many markets, and well ahead of our -8% estimate. With strong margins and cost leverage adj PBT for FY21 is expected to come in 40% ahead of our and consensus expectations. JD also provided early FY22 guidance and factoring in further lockdowns in Q1 drives our small 2022e trim though we leave FY23 materially unchanged. Treating the beat largely as a one-time event our DCF-derived target increases to 890p. With shares trading on 26x CY21 PE we retain our Neutral rating. A pandemic-proof performance since July... JD achieved 5% group organic sales growth in the period from August to early January, with minimal net space growth and an average of 14% space closed on our estimates due to lockdown restrictions. This is not far below the 13% growth JD achieved in FY Jan-20, before coronavirus upended retailing in the Western world. We understand that stores traded positively on an LFL basis when open and estimate this was supplemented with online sales growth 60% yoy. ...driving 40%+ upgrades to FY Jan-21 Despite the UK, Germany and Netherlands all currently in lockdown again for the last month of the financial year, JD expects adj PBT of at least GBP400m. We move our own forecast to GBP430m, just 2% below that achieved in the prior year. Despite the purchase of Shoe Palace (already in our forecasts) we anticipate year end net cash (ex leases) of GBP604m, suggesting plenty of scope to exploit any further MandA opportunities which may arise. Lowering FY22 to factor in Q1 lockdown impacts Management also gave unusually early guidance on outer year expectations. Factoring in lockdown running until the end of March in UK and some extended closures in continental Europe JD expects to be able to grow PBT 5-10%. This would appear conservative given Shoe Palace should add GBP40m....
Five Star: rain or shine JD’s resilience in a crisis is remarkable: for chunks of H2, all UK stores were closed and yet through Nov and Dec, sales retention was, astoundingly, 100%. Group LFL sales are up 5% so far in H2 (way above forecasts) and the new guidance smashes consensus (£410m v £295m): we add 10% to next year but the risk is to the upside if FY21 trends persist. JD just gets it: it gets the customer, it gets how important supplier relationships are (the Shoe Palace acquisition will help further with Nike), and the output of that is forecast momentum. An early 20s PE is arguably still too low but we’ll take the TP up to £10 for now. Buy. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com
FY21 PBT due to be 35% ahead of consensus with guidance for at least £400m vs company-complied consensus at £295m. Total revenues for the 22 weeks to 2 January in Group LFL businesses were ahead 5%, with online helping to offset more challenging store performance. UK sales were up c.10% for the period, with the business managing 100% sales retention through lockdown 2 (online up over 300%) versus 65% in lockdown 1. US saw August sales down (impacted by pull forward into Q2 from the US stimulation package) with sales up double digits in September/August and slightly up in November/December. Trends in Europe continued from H1 with sales in France/Germany okay and Iberia more challenging. Australian sales were up double digits with South Korea/Malaysia weak, affected by fewer Chinese tourists. Guidance for FY22 PBT to be 5-10% ahead of FY21, which assumes UK store closures could continue to Easter and other geographies impacted. This also includes the costs of ‘re-export’ tariffs to Europe, a consequence of the small print in the UK/EU trade deal. This implies a FY22 PBT range of £420m-440m vs consensus at £488m which did not reflect either of these two factors. Upgrade FY21E PBT by 48% to £402m/Cut FY22E PBT by 14% to £451m to reflect company guidance, which we suspect will prove conservative. Valuation (CY22E PE 18x) does not reflect JD’s strong cash generation nor its future growth prospects. Post pandemic, we expect JD to resume sustainable double-digit growth. It is an exciting international roll-out story with a great opportunity to leverage established growth platforms in the US and Europe, backed by its highly profitable UK market position. It also has the balance sheet (we forecast net cash of c.£600m at year end) to take advantage of other interesting acquisitions, like the recent Shoe Palace deal. TP, rolled forward a year to low/mid 20s CY22E PE, raised to 1075p (prev 950p).
Acquisition of Shoe Palace in the US for a total consideration of $681m (c.£512m), split $325m cash and 20% equity stake in JD Sports US (ie Genesis Holding, which owns Finish Line/JD Sports US). Shoe Palace is owned by 4 brothers from the Mersho family. $100m of the cash payment is deferred and will be paid out over the next 12 months. The initial $356m equity valuation of the 20% stake in JD US is based on 11x EBITDA. A number of put & call options have been put in place to enable future exit for the Mersho Brothers should they wish. These commence after the end of FY25. Shoe Palace has 167 stores with 90 in California and a presence in Texas, Nevada, Arizona, Florida, Colorado, New Mexico and Hawaii. The average store size is 3,000-3,500 sq.ft with apparel accounting for c.8% of sales and ecommerce c.5% (low vs JD). The company has excellent relationships with all the major international brands and already had double digit EBIT margins pre COVID. Shoe Palace looks highly complementary, both geographically and in terms of community, focusing on the Hispanic/Latino population. Finish Line is more mid/blue collar America. JD can add value via apparel, ecommerce and sales analytics with Shoe Palace helping with JD’s site acquisitions in the US. FY21E/FY22E Group PBT upgraded by c.1%/c.6% to reflect the acquisition. Shoe Palace made sales of $435m & PBT of $52m in the year to the end of December 2019 and has since been hit by store closures in California from COVID in 2020. We assume Shoe Palace adds FY21E/FY22E EBIT of £3m/£30m (post c.£5m of investment/integration costs). Our TP, based on low/mid 20’s CY21E PE, rises to 950p from 800p, reflecting upgrades & greater confidence in recovery. Valuation (CY22E PE 15.5x) does not reflect the strength of JD’s cash generation and future growth prospects. We believe it is well positioned to resume sustainable double-digit growth with upside risk to forecasts.
JD know the way to San Jose Shoe Palace (SP), the 167-store California-based shoe and lifestyle retailer has been acquired by JD in a US$681m deal (11x EBITDA). SP is a very well-regarded retailer (this is not a distressed asset: quite the opposite), with an extreme closeness to its predominantly Hispanic and Latino customer base. It’s a great fit for JD: Finish Line has a weakness on the West coast and doesn’t really connect with the shoppers SP is close to. The deal could have happened earlier, but for Covid-19, and is perfectly in line with the strategy to bolt-on good businesses in existing territories. No change to our support for the shares and strategy. Jonathan.Pritchard@peelhunt.com, John.Stevenson@peelhunt.com 2-page note
JD Sports has already reported for much of Nike’s Q1 as JD’s 1H21 results were to the end of July and August was included in its current trading comments. However, Nike’s update gives some strategic insight into Nike’s US strategy which JD’s strategy dovetails nicely with and Nike’s forward guidance is encouraging for the overall category. Nike guides for revenue to be up high single to low double-digits YOY. Supply is expected to be constrained near-term due to supply decisions taken at the start of the pandemic, with 2H growth to be up significantly. Our JD forecasts are based on Sports Fashion revenues down 7% in 2H and we continue to believe risk is on the upside. Nike Q1 revenues down 1%; key points For the 3 months to 31 August, Nike reported Q1 revenues down 1% yoy (flat at constant FX) with Nike Direct +12% (+13% at constant FX). Nike Brand digital sales increased 82% (83% at constant FX), with a double-digit increase in the US and triple-digit in EMEA, and now account for over 30% of its business. Nearly all NIKE-owned physical stores were open in the US, EMEA and Greater China, with 90% open in APLA. Store sales were down yoy though EMEA returned to growth, up 5%, and Greater China up 6%. The US was down 1%, with footwear up 11% and apparel down 21%. Group gross margin was down 90bps, impacted by higher promotions to clear stock. Tight cost control and lower tax meant net income increased 11%. Innovation resonated well and was an even larger part of the mix in Q1. Inventory is healthy and stock levels are expected to normalise over the next 2 months. Stock has been cleared at lower promotional levels compared to the overall market. Strong momentum in iconic styles like the Air Force 1 & Air Jordan 1, along with Women’s Apparel, which grew nearly 200%. Nike continues to accelerate the shift to its One Nike marketplace approach, which leads with Nike Digital and its own stores as well as a small number of strategic partners which share the Nike vision. In the US, Nike shifted product allocations to fuel higher demand in Nike Digital and a smaller group of strategic wholesale partners. The result was high single-digit growth in differentiated wholesale offset by a decline of over 20% in undifferentiated wholesale, all with higher full price realization versus the prior year. Nike expects this trend to continue throughout this fiscal year as it changes the shape of the North America marketplace and continues to rationalise its wholesale channel. Nike earns 10% points higher gross margin on digital revenues versus wholesale.
The King of Cash Last week the self-styled ''King of Trainers'' reported strong half-year results with sales and profits substantially ahead of our above-consensus forecasts. However, the standout performance was a GBP647m year-on-year increase in net cash. Although timing effects will result in partial reversal in 2H this nevertheless means JD has achieved far better control of net working capital than we had anticipated. Having now had the opportunity to follow up with management we update forecasts with EPS rising over 50% this year, though largely unchanged for FY Jan-22 onwards. Still, with stronger cash generation our DCF-derived target increases to 840p. Maintain Outperform. Strong sales, particularly in USA... Sports Fashion LFL sales declined just 4% on our calculations, despite store closures for nearly half of the period. Online grew c.110% year-on-year we estimate, whilst store LFL''s fell 27% over the entire period but were up around 10% when open. US fiscal stimulus was a major driver (Finish Line +50% from reopening to end of the period) so momentum will almost certainly now fade somewhat. We forecast LFL sales -6% in 2H leaving full year profit forecasts ahead of consensus. ...partly offset by higher costs due to channel shift Gross margins declined just 150bps in the main division in H1 as strong US gains were offset by increased clearance costs of stale Winter stock. Inventories down 16% yoy strongly suggest a ''clean'' position for the remainder of the year. Group opex only declined 1% yoy though and, stripping out government support and one-time COVID costs, rose 7% - we suspect largely driven by channel shift. For FY Jan-22 channel mix as well as absolute revenues will be major determinants of profitability. Each 1% shift in channel impacts margins c.25bps we estimate. Updating forecasts and valuation Changes to our forecasts are shown in Figure 1. For FY Jan-22 we still sit 9% ahead of consensus EPS (Figure 2). On our...
1H21 results will have been hit by the full impact of lockdown The impact of lockdown on 1H21 results is difficult to forecast with any accuracy, given the variation in response to the pandemic and length of lockdown by country, Government support available, and the wide difference in cost flexibility and profitability by region. We forecast 1H21E Group sales -25% to £2bn with underlying PBT (pre IRFS16) down 85% to £24.4m. Sports fashion EBIT is forecast to be down 70% to £56m with Outdoor losses increasing to £28m (1H20 losses £18.2m). Anecdotal evidence suggests that athleisure remained an in-demand category over lockdown. Management last commented, at the FY20 results at the beginning of July, that trading YTD during lockdown had been better than expected, with online sales up triple digit. Online penetration historically was c.20% of ‘normal sales.’ This necessitated a warehouse reconfiguration, so JD now has the capacity to deal with a ‘Black Friday’ every day. There has been little promotional activity so margin is likely to be better. Online growth is likely to have slowed from the elevated levels post stores reopening. Stores began reopening from the end of April, with most stores open from 15th June when the UK finally started to reopen. Reduced footfall has been partially offset by stronger conversion. Trading updates from others, such as Nike, suggests US sales could be up year-on-year, with the UK in positive territory and Europe down c.20% to 30%. The phased nature of the reopening makes it difficult to gauge sustainable demand, with some pent up demand initially expected. With a couple of months of trading under their belt post reopening, management should hopefully have a clearer view of how the group may be able to trade Christmas under social distancing. We will be looking for an update on the new product pipeline after the brands rephrased their launch programme, as well as a view on promotional activity and stock levels in the wider market. Has confidence changed and impacted views on the scale of the opening programme going forward and the completion of the US conversion programme over the next 2 years? Well-positioned to resume historic double-digit growth profile in the near future. Reiterate BUY Valuation (CY21E PE 18.9x) looks undemanding for an International roll-out story and, in our view, does not reflect the strength of its brand relationships nor JD’s market niche with an industry-leading, highly elevated consumer proposition. We believe the company is well positioned to quickly resume its historic double-digit growth trajectory and see risk to forecasts as on the upside, though clearly the path of the pandemic over the next 6 months remains unclear.
Encouraging early trading post end to lockdown Inline profits for FY Jan-20 are largely an irrelevance at this stage, though over GBP100m beat to our and consensus'' expectations was a notable positive. Of more significance, online demand during lockdown, and combined demand since stores have re-opened are ahead of our and management''s prior expectations. Acknowledging the risk that trends could soften as pent-up demand fades, we see room for more optimism. We increase FY Jan-21 PBT to GBP92m (from GBP40m) and outer year EPS by c.3%. On revised forecasts for FY22 we sit 10-15% ahead of consensus and, increasing our DCF-based TP to 790p, we reiterate our Outperform rating. Earnings in line, cash beats Full year LFL sales rose 12% in the main Sports Fashion division, and 9% at Finish Line (which annualised consolidation in 2H), implying strong sales growth was sustained into the second half. Management confirmed momentum carried on in the first few weeks of FY21 prior to lockdown. Margin performance was notably strong in the US, rising 380bps yoy in the second half though we still see 200bps further mid-term opportunity. Losses increased to GBP16m in the Outdoor division, but following the recent pre-pack administration we see scope for major rent-based cost reduction. Current trading encouraging, cost control in focus Online (c.20% mix) rose ''triple digit'' during lockdown and since reopening stores have traded ahead of management expectations. Overall for H1 (to end July) we now forecast Sports Fashion LFL down 29% (was -38%). Together with support from brands to delay intake, inventory is reported relatively clean so we now anticipate lesser gross margin pressure too. JD is also actively seeking to lower rents and we think is well placed to do so. It has one of the shortest remaining lease commitments of our UK coverage, as explored in our recent sector Disruption report. JD remains a top pick - TP increased to 790p With net cash beating...
Nike - New digital empowered phase of consumer direct strategy announced with Q4 results Of relevance to JD Sports, Nike (NR) announced a new digitally empowered phase of its consumer direct strategy last night with its Q4 (end May) update. It increased its 2023 digital penetration target, both owned and partnered, originally set at 30% in 2018, to 50%. Whilst the bears of JD might point to increased risk of disintermediation, in our view more importantly, from JD Sports’ perspective, Nike management reiterated that its strategic wholesale partners are a very important part of the new strategic focus. Consistent with its recent strategy, Nike continues to envisage having fewer wholesale partners. Management talked about its OneNike marketplace strategy, which leads with Nike Digital in its own stores and embraces a small number of strategic partners with the same vision ‘to provide a consistent premium shopping experience’ and ‘providing a seamless experience, a consistent seamless experience with physical points of presence.’ Nike plans to use connected data, inventory and membership to give consumers greater access to the best of Nike, with more speed and convenience than ever. Membership is now central to Nike’s growth strategy. It will also scale its investment and smaller format digitally-enabled mono-brand stores with integrated online-to-offline capabilities. The mono-brand stores will be used to accelerate Nike's growth in Women's and Apparel which are seen by management as two of its best long-term profit opportunities. It envisaged opening 150-200 new mono-brand stores in North America and EMEA. Nike’s June US retail sales up double-digit, EMEA slightly up. Positive read across to JD showing athleisure in demand Nike’s Q4 revenue fell 38% on a reported basis (down 36% at constant FX), reflecting store closures and lower wholesale shipment. In Q4, 90% of Nike’s own stores outside of Greater China & South Korea were closed for c.8 weeks. Its wholesale partners’ stores similarly impacted. Stores started to reopen in mid-May with c.85% of Nike owned stores now open in North America, c.90 percent in EMEA, c.65% in APLA or operating under reduced hours. North America Q4 revenues fell 46%. As retail began to reopen in mid-May, Nike retail sales were up double-digit for all brands across the total North America marketplace and this trend has continued into June with Nike digital up triple digit. Physical retail traffic is down, but conversion up due to promotional activity as well as a shift to owned and partner digital. EMEA Q4 revenues were down 44% on a currency-neutral basis with Digital up nearly 100%. As retail has reopened, Nike has seen total retail sales grow slightly year-on-year, with better performance in Germany, France and UK offset by slower Spain & Italy. European traffic levels, conversion trends and consumer shifts towards digital are similar to those seen in North America. continued overleaf
Acquired substantially all the assets of Go Outdoors in a pre-pack from the administrators Post market close last night, JD Sports announced that administrators have been appointed for Go Outdoors and the assets bought back via a pre-pack. Having looked at options including a sale process, the Group, via a newly incorporated subsidiary has subsequently re-acquired the business and substantially all the assets of Go Outdoors from the administrators for £56.5m. The £56.5m returns to the Group (as the secured creditor) as partial repayment against Go’s historic indebtedness. At the point of administration, Go Outdoors had 67 stores. The Group has taken an initial 12-month licence so it will occupy all the stores and intends to retain the majority. We believe the number retained is likely to depend on how demand recovers post COVID and whether lower/more flexible rents can be agreed with landlords. Go Outdoors’ average lease length was 10 years with upward only rent reviews, many of which were fixed at above inflation. The Group intends to honour the principal historic liabilities of the Go business including branded stock suppliers, HMRC liabilities on taxation, customer returns, and gift cards. All staff will be transferred across to the new business with their previous terms and conditions of employment preserved. Next news: Nike Q4 earnings on 25 June & JD Sports FY20 results on 7 July As highlighted in our note Go Outdoors - Considering options earlier this week, JD Sports has struggled to build a profitable Outdoor business ever since it acquired Black/Millets from administration back in 2012. It hoped the Go Outdoors acquisition at the end of FY17 would help with its added scale. It did not and we are not surprised by management’s actions. After 4 years of deteriorating performance, our current FY21E forecast assumes an EBIT loss of £24.5m for the Outdoor division (incl. Blacks/Millets/Tiso/Ultimate Outdoors). It appears to us that Go Outdoors was unlikely to survive in its current form, even without COVID-19, given the inflexibility of the lease structure and a declining footfall profile with the shift to online. The next news from JD Sports is its FY20 results to end-January, which pre-date the COVID-19 impact. Focus will be on any update on current trading. Virtually all Group stores have reopened. Anecdotal evidence from other retailers suggest the loungewear/athleisure category has held up well during lockdown and been in demand post reopening. We believe JD Sports is well positioned with its market-leading, multi-channel proposition to quickly resume its historic double-digit growth trajectory. We reiterate our BUY.
Notice lodged to appoint administrators for Go Outdoors JD Sports has confirmed weekend press speculations that it is considering strategic options for the future of Go Outdoors, and that,as part of those options, the Group has lodged a notice in Court to appoint administrators. We are not surprised as JD has struggled to build a profitable Outdoor business ever since it acquired Black/Millets from administration back in 2012. The pandemic has not helped the situation with the timing of store closures during lockdown resulting in Go Outdoors missing the key camping season from an annual profit perspective. In addition, with quarterly rent day being June 24th, we would expect a number of other retailers to be looking at similar strategic options in an attempt to create a viable profitable business long term. JD Sports acquired Go Outdoors at the end of FY17 for £112m, hoping that the added scale the business would give the combined Black/Millets/Tiso business would help create a profitable Outdoor division. This failed to materialise. We forecast a fourth year of deteriorating performance in FY21E. The Outdoor division reporting a loss of £4.3m in FY19 versus a profit of £8.8m in FY18. Having reported a 1H20 loss of £18.2m, we forecast a loss of £17m for FY20E and £24.5m in FY21E. Outdoors is a notoriously difficult category in which make money as it is very weather dependent, but also highly promotional with aggressive online propositions. Next news - FY20 results to the end of January, due 7th July Ultimately, from a Group profit perspective, the Outdoor division is dwarfed by the Sport Fashion division, which remains the driver of Group growth. Whatever decision management takes on the future of Go Outdoors, it is unlikely to materially impact our forecasts. We believe JD Sports is well positioned with its market-leading, multi-channel proposition to quickly resume its historic double-digit growth trajectory. Anecdotal evidence from other retailers suggest that the loungewear/athleisure category has held up well during lockdown. We expect the athleisure market to rebound relatively quickly following months of customers being cooped up and, from their recent updates, we do not expect Nike (NR) or Adidas (NR) to flood the market with surplus stock. Next news is Nike Q4 earnings on June 25th with JD Sports FY20 results on July 7th.
We held a call for investors with CFO Neil Greenhalgh yesterday. Comments and confidence were consistent with its recent COVID-19 statement. JD has sufficient liquidity (£1.2 billion) to ride out a 6-month closure (see Positioned to resume growth) and is well positioned with its market-leading, multi-channel proposition able to quickly resume its historic double-digit growth trajectory, in our view. We expect the athleisure market to rebound relatively quickly following months of customers being cooped up and from their recent updates we do not expect Nike (NR) or Adidas (NR) to flood the market with surplus stock. Main takeaways 20% of its US stores reopened in the last week. In Europe, there are now a handful of stores open in each of Italy, France, Spain and Belgium. This is in addition to Germany, the Netherlands and Scandinavia. Store in Australia and Asia have traded through the pandemic Early feedback is that footfall in Europe is down significantly as one would expect. No weekend spikes. In the US, footfall is less than expected though it is only week 1. Management puts this down to having a mall-based portfolio with space. Interestingly in Europe, street-based stores are generally doing better than Malls. Conversion is up in both regions. UK will hopefully start to reopen in June. Stores with a street entrance will open first. The UK portfolio is split c.50:50 between street and shopping centres. Online, which historically was c.20% of sales, traded throughout. Sales have accelerated since Easter. Given Adidas recently reported that its online business was up 35% in Q1, +55% in March and up by triple digits in early April, demand for athleisure is clearly there and we would expect JD to have performed similarly. The warehouse has been reconfigured so that JD has the capacity to deal with a Black Friday every day. There has been little promotional activity so margin is better. Q2 launches by the brands have effectively been shifted to Q3 with Q3 shifted to Q4, so effectively a quarter of launches is lost. There is likely to be some promotional activity initially to get consumers’ attention which will be lower margin. Further market consolidation will be a theme and JD has the liquidity to take advantage, assuming the price is right. It has been approached about European opportunities and further afield. US strategy unchanged with plans to convert 100 Finish Line stores to JD over the next 2 years. This will now be more phased to FY22. It currently has just over 500 Finish Line stores and long-term will probably end up with c.300 of each fascia. Heading3 .
Acquisition of Footasylum prohibited by the CMA and disposal required This is disappointing news, particularly as Footasylum was struggling financially pre-acquisition given its lack of scale and its trading would certainly have been materially impacted by COVID-19 as a store-based retailer. JD is carefully considering whether to appeal the decision. If unsuccessful, the CMA requires the disposal of Footasylum. Clearly, given how much the competitive environment has deteriorated and the accelerated structural shift online likely post COVID-19, it is highly unlikely that JD will recoup anything close to the original £90m acquisition cost in our view. No change to Group forecasts We had assumed no profit contribution from Footasylum in our forecasts. Internationally business starting to reopen, though small as a percentage of Group. UK and US stores remain closed JD’s stores have been reopening in Germany and the Netherlands. Management previously indicated that footfall is down, as to be expected, though conversion is better. Its Asian business continued to trade through the pandemic. JD has continued to trade online, which historically accounted for c.20% of Group sales. Adidas (NR) recently reported that its online business was up 35% in Q1, up 55% in March and up triple digit in early April. Demand is clearly there for athleisure, based on what Adidas and other retailers have reported, so we would not be surprised if JD Sports has benefitted similarly, though the bulk of its profits are generated in-store. Sufficient financial headroom to cover a 6 month store closure As highlighted in our recent note, Positioned to resume growth , our cash burn model suggests that JD Sports has sufficient headroom to cover a 6 month shutdown. JD confirmed it has £1.25bn of debt headroom when it released its COVID-19 update (24th March) and we estimate the cash burn at c.£132m a month, which does not include any financial aid that it may be able to access in its international markets. The valuation (CY21E PE 13.8x) looks undemanding for a business we believe is well positioned with its market-leading, multi-channel proposition able to quickly resume its historic double-digit growth trajectory. We expect the athleisure market to rebound relatively quickly following months of customers being cooped up and we do not expect the brands to flood the market with surplus product.
Most of JD’s physical estate is closed. Its UK stores closed on 23 March, with the US shutting the week before and Europe the week beginning 9th March. This is effectively all of its physical estate. Online, which is typically 20% of annual sales, is still open as are its stores in Asia (Malaysia, Thailand, Singapore, South Korea and Australia). We have modelled the profit impact of a 25% and 35% fall in FY21E Group sales, looking at the incremental profit ‘lost’ on these sales which would be higher margin than the reported margin due to fixed costs. It is too early to model the impact at the individual business. This is challenging given the wide difference in JD’s EBIT margins (pre-IFRS 16) between businesses (JD UK 16%; JD Europe 8.5%; and JD US 4.9%) and is unlikely to be any more accurate. Downgrade FY21E/FY22E PBT by 79%/7% which assumes a 2-month shut-down, then 2 months of sales down 50% and 3 months of sales down 10%. This implicitly assumes online is also closed which is not the case currently. Our FY20E PBT forecast is unaffected, with results now expected in late May. Sufficient financial headroom to cover a 6-month shutdown based on our cash burn scenario. JD confirmed it has £1.25bn of debt headroom when it released its COVID-19 update (24th March) and we estimate cash burn at c.£132m a month, which does not include any financial aid that it may be able to access in its international markets. Undemanding valuation (CY21E PE 11.2x) for a business we believe is well-positioned with its market-leading, multi-channel proposition to quickly resume its historic double-digit growth trajectory. We expect the athleisure market to rebound relatively quickly following months of being cooped up and do not expect the brand to flood the market with surplus product.
Nike had strong momentum pre COVID-19 Nike Q3 sales to the end of February were up 5%, or 7% at constant FX, driven by 13% constant FX growth in NIKE Direct (digital up 36%) which was offset by the impact of COVID-19 in Greater China. Europe, Middle East and Asia sales +13%, with US +4%. Profit exceeded guidance due to cost flexibility. Learning from China and Asia experience Nike began opening Chinese stores c.30 days ago, with c.80% now open. It has opened its first store in the Wuhan area. In China, it is seeing a double-digit increase in retail traffic week on week, with some stores back to prior year levels. In China, weekly active users of the NIKE activity app were up 80% by the end of Q3 versus the beginning of the quarter. Data from China, Japan and Korea is consistent with 4 main phases: (1) Containment lasted 4 to 6 weeks. Stores were closed, but online in all markets remained strong; (2) Recovery – all 3 markets are through that phase now with consumers coming back on the street. Digital actually accelerated when stores opened; (3) Normalisation is where they are now; and 4) Growth. Nike is using its Chinese experience to engage with European and US customers digitally. As it says “while the organized world of sport is on hold, the global culture of health and wellness continues unabated”. It still has great products to launch, some of which may be launched just online. The company did that in China and demand was good. Working with partners to get up and running quickly Nike is working at realigning its supply chain operationally and adjusting its launch pipeline. It was fortunate to have good rates of sale through going into the crisis so inventory is healthy. It is working closely with strategic partners such as Foot Locker, DICK’S, JD and Zalando, across the US and Europe so they can come back stronger. To quote “we’re working with our partners in the US in a similar regard managing the inventory they have on hand, the inventory we have on hand relative to them, and how best to flow that through their digital pipes as well as ours”. We expect a managed start up from the brands post COVID-19 and would not expect Nike nor Adidas to flood the market. JD is well positioned, helped by a market-leading, multi-channel proposition in many of its markets. We believe the athleisure market will rebound relatively quickly and JD’s customer base should be less financially impacted as parents are likely to have carried the financial burden. JD forecasts are pre-COVID-19 and will be reviewed when there is more visibility.
Most of its physical store estate now closed JD has announced that all its UK stores were closed last night. Its US stores closed at the end of last week and Europe some 2 weeks ago. Effectively all its physical selling space is closed although its online business, which is typically c.20% of annual Group sales, and its stores in Asia (Malaysia, Thailand, Singapore, South Korea and Australia) are still trading. In keeping with its peers, management is looking at preserving cash via cost and capex savings. In the UK, it will be able to access the Coronavirus Job Retention scheme (INVe £18m per month), benefit from the business rates holiday (c.£60m) and the deferral of all HMRC payments (PAYE, National Insurance, tax and VAT). It is also in discussions with landlords with regards to the timing of future rent payments. Other European countries are offering similar schemes to the UK’s Job Retention scheme, though at different rates to the UK. The equivalent of business rates does not exist in Europe. In the US, it still remains unclear whether there will be similar support from the US Government with the retail industry actively lobbying for support. No issues with regards to liquidity – £1.25bn of headroom JD Sports has c.£1.25bn of debt headroom which is sufficient to support the business through this challenging period (see our cash burn scenario overleaf) and it is in one of the strongest positions of all the companies in our coverage universe. We were forecasting year-end net cash of £260m at end-January and understand from the company that net cash was c.£300m at the end of last week. Fortuitously, JD Sports increased its RCF to £700m at the end of last year and also has a $250m facility in the US. We make no change to FY21E/FY22E forecasts for the time being until the situation is clearer. Expect JD Sports to emerge strongly post this crisis We believe JD Sports will emerge strongly post this global pandemic, helped by its market-leading, multi-channel proposition in many of its markets. We would also expect the athleisure market to rebound quicker than most non-food categories and believe JD’s customer base should be less financially impacted as parents are likely to carry the financial burden. JD Sports was due to report its FY20 results on 15th April. Following the request from the FCA to observe a moratorium on the publication of results for at least 2 weeks, these will now be delayed to probably the second half of May. Continued overleaf
Adidas expected good momentum in the underlying business pre coronavirus Adidas has reported FY19 results and given FY20 guidance, which implies management expected FY19 momentum to continue into FY20 pre impact of coronavirus. The company guided to FY20 currency neutral sales +6 to +8% (US low double-digit, Asia/Emerging markets high single-digit/Europe mid-single) with an operating margin at 11.5%-11.8% and net income +10%-13%. This outlook does not reflect any impact from coronavirus. For FY19, it delivered currency-neutral revenues +6%, operating margin 11.3% and net Income +12%, with DPS +15%. China and e-commerce both achieved double-digit sales growth. Adidas’ coronavirus impact to date has been mainly direct exposure to China. It expects revenues in Greater China in the first quarter of 2020 to be between € 0.8 billion and € 1.0 billion below the prior year level. Consequently, operating profit in Greater China is anticipated to decline between € 0.4 billion and € 0.5 billion in the first quarter. Management comments that it is working with its wholesale partners to ensure inventory levels remain healthy in the market. February’s shipments were cancelled and as a result could lead to the acceptance of a significant amount of product takebacks, which the company plans to clear through its own channels throughout the remainder of the year. It has started to observe traffic declines with a corresponding negative business impact in Japan and South Korea. On supply chain, Adidas is saying there has been some disruption but the majority of factories in China are operational again and global sourcing activities have not been impacted so far. The extent of spillover into other countries as well as the availability of raw materials remain largely uncertain and the future impact cannot be quantified. Next news from JD Sports – 15th April FY results to end of January From JD Sports’ perspective, management was comfortable with its supply levels and had good visibility on stock until post Easter when China shut down around Chinese New Year. Given the scale of JD Sports globally, we would not be surprised if JD Sports helps Adidas clear surplus stock in H2. In the meantime, like all retailers, JD may face some short-term demand issues depending on how coronavirus impacts daily life in Europe and the US over the coming months. Next news – FY results on 15th April.
A well-executed Christmas given the challenging UK High Street conditions widely reported by its peers. Management reports positive LFL sales trend in the Group’s global Sports Fashion business. This is driven by good performance in some Asian markets, Europe and the US rather than the UK. In terms of colour, management said the US has seen a slight acceleration in 2H LFL from +5% reported in H1, with the FY US gross margin on track to be up 100 bps as guided. Europe has slowed from the +21% reported in 1H20, though is still motoring at double digits. Sportzone moved into a small profit in 2H versus guidance for a small loss. Asia is small in Group terms, but Australia and Malaysia are trading well with South Korea still challenging. A solid UK performance in the context of a challenging UK High Street. In keeping with industry data/peers’ comments, JD saw lower footfall, though conversion was better. In-store LFLs were still positive, but a slowdown on 1H20 in-store LFL +c.7% was inevitable. 2H20 comps were also tough with fewer Adidas Yeezy launches yoy. We raise FY20e/FY21e PBT post IFRS 16 by 4.3%/3.8% driven by International. Management is confident it will achieve FY20 underlying PBT post IFRS 16 in the upper quartile of current market expectations (£403m-£433m). Further upside potential to FY20 forecasts. Management highlights that timing differences yoy in post-Christmas sales in a number of its European markets (e.g. the French sale period started 2 days ago) means trading in the last few weeks could yet impact FY profits given Europe’s strong momentum. Valuation does not reflect strong cashflow & International opportunities with the potential to deliver double-digit Group growth for the foreseeable future. Our TP, now based on a 25% premium to the CY20e PE of European growth peers to reflect superior long-term International growth potential, increases to 940p (from 750p).
Another strong quarter from Nike bodes well for JD Sports Last night, Nike announced a good Q2 performance, benefiting from attractive innovation. Nike’s group Q2 revenues increased 10% on a reported basis and 13% at constant FX. Nike’s Q2 brand revenues were up 12% at constant FX. Management commented that, on a currency-neutral basis, the outlook for FY20 continues to improve and it now expects currency-neutral revenue growth approaching the low double-digit range. In JD’s key regions, Nike’s Q2 US sales were up 5% (1H +4%), with footwear up 8% (1H +6%) and apparel up 1% (1H 1%). Its Europe, Middle East and Africa sales were up 14% at constant FX (1H +13%), with footwear +12% (1H 12%) and apparel +17% (1H +13%). Nike highlighted that its North American growth was driven by “Nike Direct and through differentiated wholesale partners, like Foot Locker, JD, Finish Line and Dick's.” With c.65%-70% of JD’s Finish Line sales mix being Nike, this suggests that Finish Line continues to trade well. Nike guides to 2H US comparable sales growth in the strong mid-single digit range. In Europe, Nike management talks about “extraordinary momentum in EMEA, and we expect to extend our lead fuelled by the Euro champs and the Olympics over the second half of fiscal year 2020 and into fiscal year 2021”. Positive update expected from JD Sports on 10 January with risk to forecasts on the upside Nike’s update supports our belief that the market for athleisure remains strong. We suspect the strong momentum that JD saw in 1H20 has continued into H2. JD Sports shares have rallied strongly along with its peers and are trading above our target price. We will review this when JD publishes its Christmas trading update on 10th January given that we believe risk to forecasts is on the upside. In our view, JD’s valuation can be justified by its strong cash generation and the potential to deliver sustainable double-digit growth for the foreseeable future given its multiple long-term growth opportunities. This is helped by its strong Brand relationships and unique elevated proposition which dovetails well with the Brands’ own strategic direction.
We continue to believe JD trading is fine A disappointing Q3 update from Foot Locker on Friday (22 Nov), with a pull-back in Q4/FY guidance. The company blamed a shift in launches, a tough Q4 comp with fewer Yeezy launches this year versus last, and weak apparel sales. Management also announced it would stop guiding quarterly. This followed a reasonable Q3 performance to the start of November. We would not be too hasty in assuming read-across from Foot Locker’s negative US Q4 guidance for JD Sports/Finish Line. While there are fewer Yeezy launches from Adidas this year, Finish Line’s sales were more biased to Nike and not as exposed to Adidas last year compared to Foot Locker. Its comp is not as tough (INVe Finish Line inc Macy’s 2H19 comp mid single-digit vs Foot Locker Group’s Q3 +2.9%; Q4 + 9.7%). Lead time are such that JD-bought stock only started coming into Finish Line stores from June, so we believe the business should be in a much stronger position this holiday season versus last year. We continue to believe JD Sports’ forecasts are firmly underpinned after a strong H1 performance with good momentum in all regions. Indeed, we believe risk to forecasts is on the upside. Valuation (CY20E PE 21x) does not reflect its potential to deliver sustainable double-digit earnings growth for the foreseeable future and strong cash generation, in our view. Foot Locker’s Q4 guidance disappointing after reasonable Q3 Foot Locker reported Q3 comp store sales +5.7%, with in-store +4.7% and DTC +11.4%. Gross margin improved 50bps and SG&A +10bps. It posted high-single digit comp gains in August/September’s back-to-school season and in October, the lowest volume month of the quarter, a low single-digit comp increase. By region, North America and Canada saw low double-digit gains with Champs, Foot Locker US seeing high single-digit gain. Footaction increased by low single-digits. Footlocker Europe saw low single-digit gains. By category, Footwear was up high single-digits, with apparel down high single-digits. Guidance for Q4 is for flat comp sales, which reflects the negative trends in its apparel business as well as last year’s challenging Q4 comp of 9.7% (Yeezy), gross margin down 10-30 basis points and mid to high single-digit growth in earnings per share. As a result, management’s FY expectations are now for comp sales up by a low single-digit amount (previously mid-single) and a mid single-digit EPS gain (previously high single-digit).
Good Q1 update from Nike A positive Q1 update from Nike last night, helped by a stronger-than-expected gross margin. Q1 total revenues +7% on a reported basis, and +10% at constant currency. FY guidance was increased with reported revenues still expected to be up by mid-single digits, but this incorporates an improved constant currency growth rate offset by a higher FX headwind. In terms of key geographies for JD, Nike’s Europe, Middle East & Africa total Q1 sales +12% (footwear +13%/apparel +10%), at constant FX, with North America sales +4% (footwear +4%/apparel +2%). Positive comment on key market trends for JD There were plenty of positive comments on underlying market trends, supportive of JD’s growth prospects and its relationship with Nike. Nike's management commented that it sees North America being able to sustain strong, health, mid-single digit growth and that ‘You’ll see slightly higher growth rates in North America over the balance of the year than what we delivered in Q1.’ ‘Growth in Q1 was slightly impacted again by some year-over-year comparisons not just in the jersey business, but also the timing of innovation launches in Footwear, and then again, with that kind of extended back-to-school season spanning over Q1 and into our Q2, which begins in September. So again, we see tremendous momentum in North America.’ On its North American strategic partners, of which JD/Finish Line is one, Nike said it was seeing ‘high-single digit growth in differentiated retail with our strategic partners’. On Europe, Nike commented that its strategic partnerships with JD and Zalando are also ‘contributing to our strong, sustained growth in Europe’. With regards to future product pipeline, Nike’s management described ‘the excitement meter’ as very high over the next year as it ‘looks at the Summer Olympics as term papers due’ when ‘we bring our best work not only from a brand standpoint, but certainly from a product standpoint’. On increased US import tariffs from September 1st, these will impact Nike from Q2 to Q4 with the impact more pronounced in Q2 as it will have had less time to manage potential mitigating levers. These are in the raised FY gross margin guidance. JD’s growth prospects remain undervalued We continue to believe JD Sports’ valuation (CY20e PE 19.8x; FCF yield 8.5%) does not reflect its longer-term growth opportunities nor its strong cash generation. After a strong H1 performance, risk to forecasts remains on the upside.
H1 stronger than expected, especially in the context of higher-than-expected Outdoor losses. Group PBT before exceptions & IFRS 16 was £166.2m (+36% or +30% incl. IFRS 16) driven mainly by (1) Global Sports Fashion fascias LFLs +12%; (2) 5% yoy JD space growth; and (3) annualisation of the US acquisition. Year-end net cash was £118m, an impressive yoy increase of c.£200m. UK core sports fascias delivered an eye-catching ‘more than 10%’ LFL sales growth incl. online against the backdrop of a challenging UK retail environment. Strong European momentum continues with JD’s LFL sales up c.20%. The integration of Sport Zone is approaching completion, with the loss reduced to £4.1m (LY H1 loss c.£10m). A net 23 stores opened in H1. US performance pleasing with integration on track. 1H LFL sales in-store +3% (against tough clearance comps), with double-digit online growth and gross margin +50bps. JD now has 6 JD stores with the first flagship due to open in 2020 (Time Square) and is making progress in closing loss-making stores. Outdoor results disappointing. H1 losses increased to £18.2m (LY loss £3.8m). Variation in weather comps meant sales were volatile. Blacks & Tiso 1H LFLs were +3% after Q2 sales recovered strongly. Go Outdoors struggled (higher exposure to camping) and suffered short-term distribution issues. Upgrade FY20e/FY21e PBT by 5% pre IFRS 16 adjustment which assumes H2 c.12% profit growth. Post IRFS 16 adjustment, the PBT upgrade is c.1.5%. Management guides to FY profits at the top end of £402m-£424m market consensus range pre IFRS 16 or the mid-point post IFRS 16 adjustment.
Sports fashion retailer JD Sports (“JD”) is due to report its interim results for the six months to the end of July on Tuesday 10th September 2019. We look for an update on the international plans of the company, together with the trading performance of the US stores, in particular the six stores that have been converted from Finish Line to the JD fascia. We also look for an update on the on-going CMA inquiry into Footasylum. In our view, JD remains a well-managed company with good cash generation and tight stock and cash controls. We believe that the growth prospects of the business justify its premium rating and are happy to reiterate our BUY rating.
LFL sales trends seen in Q1 similar to 2H19, i.e. positive in-store LFL in the UK, double-digit growth in Europe and low to mid-single digit in the US. A net 29 stores were opened YTD (net 18 Europe/5 Asia/5 UK/1 USA), with c.80 still planned for FY20. US JD website launched in May. Management is still encouraged by the US performance, with JD bought stock about to go into store. On track to achieve FY20 PBT at least in-line with consensus (£404m according to the company versus INVe £406m). No change to forecasts at this early stage in the year, though risk is firmly on the upside, in our view, given momentum. Demand for athleisure globally remains strong as seen from Nike’s recent update, which maintained its high single-digit FY20 revenue growth range (Q4 US revenues +9% and EMEA +11% at constant FX). Both JD and Footlocker say the innovation pipeline appears strong, which is an important driver of performance and bodes well for H2. TP raised to 720p (from 580p) as we roll forward our valuation benchmark to CY20e earnings. Our TP is based on the average PE of a basket of European growth peers cross-referenced with DCF. Valuation (CY20e PE 16.6x) undemanding given strong cash generation and the potential to deliver sustainable double-digit growth for the foreseeable future, helped by its strong Brand relationships and unique elevated proposition which dovetails well with the brands’ strategic direction. We continue to see risk to forecasts on the upside. Next news: H1 results on 10th September.
Sports retailer JD Sports (“JD”) delivered record results for FY2019F showing clear momentum across the group, after the transformational Finish Line acquisition in the US. In particular, we highlight LFL sales strengthening in the second half, highlighting the double-digit growth in both Europe and Asia. JD continues to make encouraging noises about its US acquisition and we note the commentary that the company ‘remains very optimistic on the US opportunity.’ There is a clear plan to trade the US business harder implying a significant margin opportunity, as the product mix is tailored with more clothing introduced alongside the existing footwear ranges. In our view, the company deserves to trade on a premium rating justifying the rising valuation multiples, given the international growth prospects. JD is well managed by an established management team with good cash generation and tight stock and cost controls. Despite the recent share price appreciation of 22% in the last month, we continue to reiterate our BUY rating.
Sports fashion retailer JD Sports is due to announce its preliminary results for the year (ended January 2019) on Tuesday 16th April 2019. We have been highlighting for some time that JD has several growth levers that continue to give the business momentum and double-digit earnings growth potential. We look for an update at the prelim results on the US acquisition, where the company has been conducting store trials to rebrand some of the Finish Line stores under the JD fascia. JD remains a tightly managed company with good cash generation, international expansion and good growth prospects. We reiterate our BUY rating highlighting the growth opportunities both internationally and in the UK.
Few retailers can boast the enviable track record of JD Sports, the ambitious multi-channel ‘athleisure’ business with a fashion-forward offering that combines the major sportswear brands with established own-label ranges. The company’s expanding international footprint is about to be enhanced by a potentially game-changing recently announced US acquisition, which has yet to be reflected in the consensus forecasts.
H1FY18’s strong results will confound the bears as they represent a mild positive profit surprise (with a c+2% upgrade expected relative to the midpoint of the £268-£290m PBT consensus range), potentially triggering a new wave of the powerful positive earnings momentum which has been the key driver of the material stock price rise (+c375%) and sizeable valuation multiple re-rating (high single digit to high double-digit) since 2014. Expectations had been for JD.L’s hitherto material earnings momentum to have stalled, best demonstrated by the market overreaction to June 29th’s overcomplicated AGM trading statement. Today’s positive profit surprise is even more significant considering that H2 is critical for profits (typically, the H1/H2 profit split is 35:65). In short, these results demonstrate JD.L is assuredly becoming a credible international growth story, with multiple drivers to propel profits higher, which has positive implications for sentiment, forecasts and valuation. We maintain our BUY.
The absence of any share price bounce post the pronounced fall in JD.L since June 5th (-21%) seems to be pricing in heightened investor concerns including; (1) the competitive threat posed by Nike (JD.L’s most important brand, representing c35% of the sales of the core “JD” sports lifestyle fashion business) selling directly to Amazon’s main platform and indeed increasingly direct to consumers as part of its recently announced major Consumer Direct Offense; and (2) a periodically price promotional backdrop in the wider sportswear market, particularly online, which was alluded to in JD.L’s recent AGM statement highlighting some margin pressure. Given that the JD.L AGM statement on June 29 represented the first trading/results RNS in the last twelve (over the past 2 years), that did not constitute a profit forecast upgrade, investors seem to have concluded that JD.L’s hitherto material earnings momentum may be stalling, leading to the sharp sell-off, in our view. We address these key points of debate and outline underappreciated elements supportive of the financial endurance of the JD.L story and superior valuation multiples. We use this note to update our stale forecasts to catch up with consensus upgrades post FY17 results. We reiterate our BUY and TP of 420p.
Post today’s exceptionally strong Xmas trading update, JD’s management is now guiding that FY17 PBT will be up to 15% ahead of the current £200m consensus estimate. We believe that forecast risk remains firmly on the upside for the foreseeable future as we see no signs of a slowdown (viz. the outlook statement), albeit we remain very alert to the risks of such a scenario. JD is moving from a successful UK retailer to a credible international growth story which has positive implications for sentiment, forecasts and valuation. We use this note to update our stale forecasts to reflect the combined effects of the last three sizeable positive profit surprises (July, Sept, today). Our new TP is 420p.
JD’s FY16 PBT of £157m (vs our forecast £156m) has duly beat consensus estimates by 4% as we flagged in our April 12th note, highlighting that forecast risk remains firmly on the upside for the foreseeable future as we see no signs of a slowdown (viz. the outlook statement), albeit we remain very alert to the risks of such a scenario. Multiple FY16 positives to highlight which underpin further progression in FY17; (1) The continued eye-watering LFL sales growth which has driven multiple material upgrades to forecasts throughout 2015 and 2016; (2) The strong cashflow generation and gross margin evolution; (3) The pronounced strength in branded athletic footwear over the past 2-3 years has unequivocally spilled over into clothing, notably in H2FY16 and remains very healthy so far in FY17; (4) continued progression/strength in online; and (5) European growth which could provide the next significant leg of the overall growth story, underpinning a continuation of JD’s impressively strong financial track record over the past 10 years under the current management team. We reiterate BUY.
JD reports FY16 results on Thursday April 14th. We expect JD to deliver a sixth consecutive outperformance of consensus expectations over the past year alone. We upgrade our FY16, FY17 and FY18 PBT estimates (partly catching up with history of two “positive profits surprise” trading updates in quick succession), putting us 5% and 9% ahead of consensus for FY17 and FY18. Forecast risk remains firmly on the upside in our view, driven by a combination of (1) JD’s unique positioning in a robust retail sub-sector enjoying strong pricing power (ASPs +5%) and (2) the benefits of numerous JD sales productivity and operating efficiency initiatives which are now manifesting themselves after several years of investment in UK stores (design, visual merchandising and instore digital technology), European store rollout, brand supplier relationship, multi-channel, and infrastructure. Our Target Price rises to 1325p from 1055p.
JD’s P/E ratio appears reasonable relative to those of other UK retailers of young fashion with international ambitions. However, it is almost twice the level of rival Sports Direct’s (SPD). While there are justifications for a healthy premium, it is likely to act as a brake on the valuation, as will the low dividend yield.
Continued strong trading so far in H2 has led JD to upgrade its full year PBT guidance to c£135m, leading us to upgrade our forecasts by 3.8% from £130m (cons £125m). JD’s prospects look favourable given the ongoing trend towards athletic apparel and footwear, suggesting there may yet be further upside risk to forecasts. However, limited disclosure at a time when divisional and geographic complexity is on the increase makes this difficult to be certain of. With the stock trading on a cal’16 P/E of 18x or 10x EV/EBITDA which now equates to a 10-15% premium versus Sports Direct. Hold
Nike delivered blowout Q1 FY16 results (9th quarter in a row) with two standout features supporting our continued Buy on JD.L; (1) the much-better-than-anticipated sequential acceleration in Nike's Western Europe Futures number (overall product in Western Europe up by a breathtaking +22% [cc.] for delivery September 2015 – January 2016 vs. +14% in Q4 FY 15 with likely even much greater strength in athletic footwear which is JD's biggest product category); and (2) a verbal confirmation in the analyst Q+A session that Q1 Average Selling Price increases (a still underappreciated driver of JD's blistering double digit LFL sales increases over the past two years) remains in line with those seen in previous quarters (c.+5%) with no evidence of price resistance from consumers. We estimate that Nike represents c.35% of JD.L's core sports retail fascias sales (which represents c.90% of total group sales, but 100% of group EBIT). We do not upgrade our forecasts for now as Nike's Futures growth is back-half-weighted towards the Xmas period. We do however increase our Target Price by 6% to 1055p (previous 995p) to reflect our view that JD's positive earnings upgrade cycle remains firmly intact – extremely rare within the UK retail sector.
JD has delivered an excellent first half result, ahead of our forecast – although, it should be noted that in the absence of any performance details having been released in H1, forecast visibility was low. The beat against our estimate stemmed from the core Sports fascias. The combination of operational initiatives and positive end market trends suggests to us that forecast risk could still be to the upside there. Outdoor is still loss making and continues to carry surplus A/W14 stock, but changes there suggest it is on track for a return to profit in FY17. Overall the business is in good shape and investing heavily both in the UK and overseas. Visibility and disclosure on all the moving parts is low, though, which is why we are currently unable to recommend the shares to new buyers. Maintain Hold.
As we have been flagging, JD continues to surprise. JD's H1 FY15 handsomely beat expectations, but the real new news is there are no signs of a slowdown. JD is one of the very rare names in the UK retail/consumer space that has not reached the end of its positive earnings momentum/upgrade cycle. Our confidence in further estimates upgrades ahead is predicated on (1) consumer demand for athletic footwear (c.55% of core JD's sales) remains very strong and broad-based driven by a potent wave of new product/innovation (2) JD's relationship with its key brand partners —JD gets unparalleled access to exclusive products giving insulation from the price-aggressive Sports Direct— is the strongest ever to drive full-priced sales in JD's differentiated, premium-positioned retail environment, and (3) strong pricing power appears sustainable as ASPs by category are moving higher as innovation is added and consumers are migrating to higher ASP product. JD has re-rated to a justifiable 15% premium to the retail sector. We reinstate our estimates, reiterate our Buy, and raise our TP to 995p (previously 535p but placed under review).
JD has delivered a strong H1 performance, led by the core Sports fascias where we estimate LFL growth to have continued at the rate seen in H2 (i.e. +12%). This is an important achievement signifying strong growth on growth, and confirms that the favourable trend in athletic footwear and apparel is continuing. We have upgraded FY’16 PBT by 13.6% as a result. It is hard to know if this 2-year run rate can be sustained over the seasonal peak, when densities are higher, but if it can then further upgrades appear possible. Using existing valuation methodology sees our target price increase 16% to 835p (8.5x cal’16 EV/EBITDA). We retain a Hold.
Although Oxford Street capex will be >10% of JD’s £70m FY budget the use of funds is not excessive. With international aspirations JD needed to raise its profile in London to attract attention from brands and future partners. So whilst securing the lease came at a significant cost, the flagship is a key stepping stone for future development. On the £3m fit-out it should generate a direct return - the store could break-even in Jan’16 and over time could make £1-2m EBIT. The site visit serves as a reminder for anyone still confused about the difference between JD and Sports Direct too. After a good run JD now trades on a cal’15 EV/EBITDA of 8.6x. We previously used 8.0x to derive our target price. However, along with most retailers, the stock against which we benchmarked has re-rated. Sports Direct (3mths, +13%) now trades on 10x. Maintaining a 10% discount indicates a 9x target multiple, equivalent to 715p after adjusting for JD’s Y/E cash flattery. We adopt 715p as a new target but note sector multiples look rich in historic terms and after the Budget.
The FTCs decision to challenge Synergy’s merger with Steris has precipitated a sharp fall in the share price to a level we think looks compelling whether Synergy remains independent or not. If the merger completes, then a quick 20%+ return is possible. If not, then we expect Synergy to be more explicit in its growth ambitions, which in turn should lead to forecast upgrades. We therefore move the stock back onto the Buy list.
JD has traded well in the first 19 weeks of the year, suggesting the growth trends previously reported, including strong consumer demand for sports footwear, have continued. Although comps are difficult for the remainder of the year, and although they flag that JD margins in Europe will be impacted by FX, management says it remains confident in meeting FY market expectations overall. Having enjoyed a strong run over the past year the shares now trade of 16x (>8x EV/EBITDA). As noted in previous research, further re-rating from here will likely require a clearer routemap being provided in Europe and greater disclosure of the increased number of moving parts across the group in general.
