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.