JD Sports still has room to grow

True, this part of the retail market looks increasingly crowded, which has been highlighted by the recent float of Footasylum (FOOT). But what sets JD apart from its rivals and underpins its growth potential is the solid relationships it has developed with the big sports brand manufacturers. Around 50 per cent of JD’s product is exclusive, which has helped to underpin the stores’ appeal to young, image-conscious customers. 

Carrying these exclusive products has helped facilitate the group’s global expansion, too, as well as its success online. The latest geographical pushes include acquisitions in Australia, Malaysia and South Korea, although JD’s presence in Europe dwarfs other overseas markets. As well as being able to sell products exclusively, its success in overseas markets has been helped by the fact that combining shoe and clothing sales in a single store is a novel concept in many of these markets, but one that is proving very popular. JD counts 180 of its own-brand fascia stores across mainland Europe (compared with 381 across the UK and Ireland).

In its first half, JD reported that like-for-like sales had risen 7 per cent across the JD and Size? European store estate, compared with 3 per cent across the same stores in the UK and Ireland. Meanwhile, European revenues increased from 25 per cent to 27 per cent of the total, and sales from the ‘rest of the world’ were up from 2 per cent to 3 per cent. The group also expects to maintain the current momentum on new openings across mainland Europe during the second half of the financial year, with approximately one new store opening per week on average. And as the overseas operation grows in scale and maturity, profitability should start to increase. On a speculative note, the possibility that JD could look to move into the US could bring significant excitement in 2018 and would most likely be achieved through acquisition, given past form.

Exclusive product deals have also helped propel online sales, which in the first half accounted for 13.7 per cent of the total, up from 11.1 per cent. There should be much further to run with this sales channel.

It’s clear that JD is a market leader, and still growing. But much of what has harmed the share price this year is a result of the external environment faced by British retailers and a rise in costs caused by sterling’s post-referendum weakness. In particular, a mid-year trading update from JD cautioned on the margin outlook. Investors had clearly become wed to the persistent trend of earnings upgrades that have followed JD’s updates over recent years, so the minor downward revisions to brokers’ forecasts were enough to spark a sharp derating from a forward earnings multiple of over 20 to the current level just below 14. However, half-year results reported in November 2017 were greeted with upgrades once more (see chart above). We can see this trend continuing in 2018, especially as trading comparisons will increasingly be made against periods that reflect post-referendum cost pressures. 

What’s more, JD’s young trend-mad customer base is likely, judging by past trends, to prove less sensitive to economic uncertainty than other consumers.