JD Sports reports solid sales growth and strong demand

You wouldn’t imagine that retailers of sports leisurewear would have defensive qualities from an investment perspective. But half-year figures from JD Sports Fashion (JD.) suggest that demand levels have yet to trail off despite falling real wages, shrinking household budgets and 1970s-era inflation.

Organic sales grew by 12 per cent during the period under review as demand for its premium product range showed no sign of flagging. Indeed, revenue from JD's premium range, which accounts for the lion’s share of its entire sports fashion business, grew by 16 per cent to £3.5bn at constant currencies. The top-line surge for premium products was particularly noticeable in JD’s European markets, where revenue grew by a third to £774mn. The group has stepped up its brand growth on the continent through the purchase of non-controlling interests in both Iberian Sports Retail Group (ISRG) and Polish retailer Marketing Investment Group (MIG), and the acquisition of Gap stores in France. JD’s North American markets also delivered an impressive showing with related sales up by 18 per cent to £1.4bn, although that’s set against a weak comparator as regional sales slumped during the first half of FY2023.

Consequently, the group has successfully addressed supply chain issues that previously had a detrimental impact on its businesses in North America. The remedial measures precipitated what chief executive Régis Schultz described as a “more normalised promotional environment due to restored product availability”. These promotions contributed to a 50 basis point reduction in the gross margin to 48 per cent, although it remains above pre-pandemic levels.

The store opening programme sucked in an additional £52.5mn, bringing capital expenditure to £209mn. Despite the step-up in investments and a 14 per cent increase in the value of inventory, the group grew its cash balances through the period – testament to its cash-generative status.

You could be forgiven for thinking that demand for Nike trainers seems every bit as unwavering as that for a loaf of bread, but August saw a sector-wide sell-off after US rival Foot Locker (US:FL.) came up short on quarterly sales expectations. The profit warning doesn’t appear to have fazed JD’s management. Store openings are going to plan and trading over the past seven weeks has been in line with expectations, with organic sales growth of 10 per cent. At current exchange rates, the group believes headline adjusted pre-tax profit “will be in line with the current market consensus expectations” at £1.04bn (53-week period). The shares are trading below their long-term average at 11 times FactSet’s consensus earnings forecast, but we remain circumspect given the macro environment. Hold.  

Last IC view: Hold, 115p, 22 Sep 2022