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17 Jul 2024
First Take: JD Sports Fashion - Adidas raises FY guidance post Q2

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First Take: JD Sports Fashion - Adidas raises FY guidance post Q2
JD Sports Fashion Plc (JD:LON) | 80.6 0 (-0.1%) | Mkt Cap: 4,137m
- Published:
17 Jul 2024 -
Author:
Ben Hunt, CFA | Kate Calvert -
Pages:
4 -
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.