JD Sports is a winner

Mergers and acquisitions are becoming a dominant theme in the retail sector this year as companies club together to fight the tougher trading environment. But many of these proposed deals are coming under close scrutiny by regulators (Tesco/Booker, Just Eat/Hungry House). News that JD has received the green light by the Competition and Markets Authority (CMA) for its £112m Go Outdoors takeover illustrates the company's ability to execute well on acquisitions this year and beyond.

The Go Outdoors acquisition looks particularly interesting as it comes at a time when JD's existing 'outdoor' brands, which include Millets and Blacks, have finally reported their first annual operating profit. The acquisition will boost the division's online presence, increase its out-of-town locations, introduce a thriving loyalty card scheme, improve buying power and should give management scope to deploy the margin-boosting skills developed while turning around the existing outdoor business.

Acquisitions as well as store openings have also played a key part in expanding JD's international business, which last year contributed 30 per cent to group sales compared with 23 per cent the year before. The overseas operation, which is principally focused on Europe, could see further growth from more far-flung markets, given a recent push into Australia and Malaysia.

This ongoing expansion should help underpin brokers' growth forecasts and, we'd hope, provide scope to extend JD's formidable record for EPS forecast upgrades (see chart) - 2018 consensus EPS forecasts have already more than doubled since they were first issued just over two years ago. Indeed, while broker Shore Capital expects like-for-like sales growth to fall to around 4 per cent this year, from 10 per cent, acquisitions and openings are expected to mean top-line growth of 20 per cent. This won't come cheap, with capital expenditure forecast to increase from £88m last year to £150m, but JD has the cash generation and balance sheet to cope.

Importantly, there certainly seems to be plenty of momentum in JD's end markets based on a round-up of last year's annual figures: revenues rose by 31 per cent to £2.38bn, while pre-tax profits increased by an impressive 81 per cent to £238m. Meanwhile, net cash from operating activities rose from £226m to £279m. What's more, despite widely reported industry cost pressures, gross margins actually grew from 48.5 to 48.9 per cent, although the ending of currency hedges and the dilutive effect of Go Outdoors' lower-margin sales can be expected to bring this down in the current year.