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.
JD’s trading in the Christmas period saw like-for-like store sales in the core sports fashion fascias, including those in Europe, increasing by 10.6% in the five weeks to 2 January 2016. Given the continued strength in the core sports fashion fascias, JD now expects FY16 headline profit before tax and exceptional items to exceed previous consensus market expectations of £136m by up to 10%. As ever, there will be exceptional charges of c £12m relating to the write-off of capitalised costs on an abandoned systems upgrade alongside probable goodwill write-offs.
This latest upgrading of expectations follows an 8% upgrade as recently as 3 December. At a time when rival Sports Direct has struggled to hit targets, JD’s success in sports fashion stands as testament to the strength of its operating model. What’s more, the performance was achieved against strong comps for the same period in FY15 (like-for-like growth of 12% in continuing businesses). The update made no mention of the Outdoor brands (c 10% revenue). We presume that progress in that part of the group remains behind original expectations and that break-even is still at least a year away
On the basis that UK employment and real wages are increasing, we are optimistic on retail sales in 2016. The better retailers, in which group we include JD, should outperform the average. Yet management would be the first to acknowledge that expecting a fourth consecutive outperformance of expectations at Christmas is asking a lot.
Recent estimate downgrades, the capricious nature of its stake-building activities and the distractions of its high-profile disputes with other companies are among the factors that make Sports Direct an unsuitable valuation benchmark for JD. Against the ratings for other UK retailers of young fashion, JD’s seems fair.