JD Sports steps into the US

JD represents a long-term growth story, and some may want to hold off on any purchase until after a post-Christmas update scheduled for 14 January 2019, which will cast more light on recent trading. However, we feel the update is likely to be positive on the whole, showing a continued struggle on the UK high street mitigated by impressive online growth that last year supported flat underlying UK sales (the UK accounted for 65 per cent of group revenue, and less than half adjusting for The Finish Line's historic revenues).

Confidence about recent trading at JD can be taken from a recent second-quarter statement from a key supplier: sports brand Nike. In December, Nike described the Europe Middle East and Africa region (EMEA) as showing "extraordinary momentum". Meanwhile, the importance of JD as a strategic partner was highlighted by the fact Nike's management name-checked the retailer no less than three times during its second-quarter results conference call.

Nike has been whittling down the number of wholesale partners it works with as it prioritises a direct-to-consumer model. This means JD Sports' standing as a key strategic partner for Nike and other big sports brands is becoming an increasingly important competitive advantage. Such relationships give JD exclusive access to in-demand products that have real pricing power. And there’s still good customer appetite in the sportswear retail category.

One of the references Nike's management made to JD in the results call was in regard to its increasing importance in the US. True, a lot could still go wrong in the process of integrating the Finish Line acquisition, but five Finish Line stores have already been rebranded as JD Sports, with another 10 planned for the first few months of 2019. Finish Line has a total estate of around 550 stores, with the annual conversion rate expected to run at around 40-50 sites a year. While some underperforming stores will close, the majority – up to 350 based on forecasts from broker Peel Hunt – will remain under the Finish Line brand. Analysts estimate the average lease length on the acquired stores is only around four years, so the group should enjoy a degree of flexibility. Finish Line also has a concessionary arrangement with department store Macy’s until 2023, when this could be allowed to expire with minimal impact on the business.  

As new JD Sports stores roll out across the US, the group can be expected to boost apparel sales, which dovetails with the ambitions of brands like Nike. Importantly, JD is a past master at selling apparel. Of the stores already converted from Finish Line to JD Sports, Peel Hunt says apparel now represents a fifth of the total sales mix compared with the 5 per cent reported by Finish Line in 2018. But that still pales in comparison with the roughly 50 per cent proportion of the sales mix apparel accounts for across JD’s UK business and the 30 per cent in Europe. Increasing apparel sales should also help JD stabilise the acquired company’s gross margin – arguably the biggest challenge – before trying to expand it from FY2020. Peel Hunt estimates a 40 basis point improvement per year for two years from FY2020 as buying practices improve and discounting is curtailed.