JD Sports Fashion plc (LON:JD.) seems to have had the last laugh six years after Sport Direct International plc's (LON:SPD) Mike Ashley vowed to crush his main rival.
Ashely had said at a 2011 meeting with representatives in the wake of struggles at JJB Sports: “I’ll finish off JJB first and then I’ll move on to JD.”
JJB collapsed in 2012 and two years later its chief executive was jailed for fraud.
JD Sports, on the other hand, has proven Ashley wrong by overtaking Sports Direct in the UK's sportwear retail sector with a market capitalisation of £4.3bn.
In comparison, Sports Direct is worth £1.7bn.
JD Sports has flourished by targeting younger, more style-conscious customers while a series of scandals over working practices have plagued Sports Direct.
JD Sports impressed investors today with a record 55% jump in pre-tax profit to £246mln in the year to 28 January from £158mln the previous year. It beat analysts' expectations for pre-tax profit of about £225mln,
Revenue gained 31% to £2.3bn from £1.8bn as the company achieved like-for-like sales growth of more than 10% in the core Sports Fashion business.
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Shares in JD Sports surged 12.91% to 457.80p in morning trading after the results. It shares have risen 40.94% in the year to date.
JD Sports expansion plans
JD Sports chairman Peter Cowgill said its strong performance has been driven by its Sports Fashion business, which is being expanded with the roll-out of stores across the globe.
While the company has continued to achieve growth in its core UK market, it has recognised that inflationary pressures arising from Brexit means it will need to extend its reach elsewhere.
A weaker pound has pushed import costs higher for UK retailers and prompted consumers to spend more cautiously.
The group opened 54 JD Sports across mainland Europe in fiscal year 2017 and two in Malaysia. It also plans to open its first store in Australia shortly.
Turnaround of outdoor division
The company’s outdoor sports retail arm recorded its first annual operating profit of £1.2mln, attributing the turnaround to a lower markdown of inventory, a more simplified operational management structure and an improved camping proposition.
The division is made up of Blacks, which owns the Millets chain. JD Sports paid £20mln to bring the business out of administration in 2012.
In November last year, JD Sports also agreed to buy Go Outdoors for £112mln, along with £11.4mln net debt from private equity owners YFM Equity Partners and 3i Group.
The company said the deal is currently under review by the Competition and Markets Authority, which has said Go Outdoors will need to operate separately from the rest of the outdoor businesses.
Product offering
Analysts believe JD Sports, dubbed the “undisputed king of trainers”, is leading the way in its offering of athletic gear.
"The core UK Sports division is carrying strong momentum as it continues to advance its already best in class sports apparel and footwear offer,” said Cantor Fitzgerald.
“JD is now fully recognised by the leading global sportswear brands as a major European partner and player and the opportunity for further international growth in Europe and beyond is significant."
Shore Capital agrees, saying it remains bullish on the company as it believes it is one of the “strongest plays in the retail sector”.
The broker also noted gross margins improved despite inflationary pressures. The gross margin rose to 48.9% from 48.5%, with improvements in both the Sports Fashion and outdoor divisions.
Withstanding Brexit risks
JD Sports remains wary of Brexit risks despite its recent success.
Chairman Cowgill said it would be “unreasonable” to expect like-for-like sales growth in the Sports Fashion business to be maintained at the same level in the current year.
He said the slump in sterling will cause some headwinds to its UK businesses in 2017 but that the group is in a reasonable position to mitigate against any impact.
Cowgill added that the JD Sports was well positioned for further profitable growth as it continues to grow its business internationally.
“The foundation of its success remains its core sports fashion business but this is increasingly being complemented by international expansion with a net increase of 54 stores across mainland Europe during the year,” said AJ Bell.