Eyebrows were raised when JD Sports spent £20m buying Blacks Leisure out of administration three months ago. The anorak and camping gear group lost £2.2m in only three weeks of ownership – a lack of stock, high costs and large, over-rented store portfolio are blamed – and it's expected to lose at least another £10m this year. Still, we think management has what it takes to get Blacks back on track and see growth beyond short-term headwinds – leaving the shares worth buying.
It will take time, but there are plenty of costs to strip out at Blacks and gross margin is currently short of where it should be. So far, 81 shops have been shut, costing £3.5m, and others may follow. Yet, with savings not expected until next spring, earnings will inevitably suffer, at least in the first half. While JD has been getting to grips with Blacks, the rest of the business has done better than expected. Revenue topped £1bn for the first time and, while underlying pre-tax profit fell 7 per cent to £76m, that easily beat City forecasts despite including the hit from Blacks. Admittedly, lower-margin acquisitions such as Ireland's Champion Sports and Sprinter in Spain trimmed returns. A preference for sale items among cost-conscious youths didn't help, either – gross margin fell 30 basis points (bp) to 49.2 per cent, yet the like-for-like figure grew 20bp. A new warehouse in Rochdale, set to be up and running this summer, should help, saving transport time and costs.
Clearly, such investment in infrastructure and on growing the sports division will take time to recoup, but will yield results eventually. In the meantime, business during the first nine weeks of the current year has been satisfactory – like-for-like sales rose 1.2 per cent compared with a full-year decline of 1 per cent. A large war chest suggests further sports brand acquisitions, both here and in Europe, are likely, too.
Factoring in Blacks, Investec Securities now expects adjusted pre-tax profit of £65m in 2013, giving adjusted EPS of 93.6p (109.1p in 2012).
JD SPORTS FASHION (JD.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 770p | MARKET VALUE: | £375m | |
| TOUCH: | 770-772p | 12-MONTH HIGH: | 1,050p | LOW: 560p |
| DIVIDEND YIELD: | 3.3% | PE RATIO: | 8 | |
| NET ASSET VALUE | 442p* | NET CASH: | £60.3m | |
| Year to 28 Jan | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 592 | 35.0 | 48.8 | 8.50 |
| 2009 | 671 | 38.2 | 50.5 | 12.0 |
| 2010 | 770 | 61.4 | 88.2 | 18.0 |
| 2011 | 884 | 78.6 | 114.8 | 23.0 |
| 2012 | 1060 | 67.4 | 96.3 | 25.3 |
| % change | +20 | -14 | -16 | +10 |
Ex-div: 2 May Payment: 30 Jul *Includes intangible assets of £99.8m, or 205p a share | ||||
