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How JD Sports bucked the high street doom and gloom once again

Analysts reckon it’s a combination of factors, although most of thing come back to the same thing: JD sells things that today’s youth want to buy

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JD shares gained 7.3% on Monday to sit at 425.4p, valuing the company at around £4.3bn.

UK retailers supposedly endured their worst Christmas for a decade last month, but try telling that to JD Sports Fashion PLC (LON:JD.).

The trainers and trackies seller has, not for the first time, bucked the widely-reported doom and gloom in the sector.

READ: JD surges as Christmas trading boosts earnings outlook

Fellow clothes retailers Quiz Plc (LON:QUIZ) and Next PLC (LON:NXT) both cut their guidance earlier this month, while online rival ASOS plc (LON:ASC) took a kicking in December after issuing a shock profit warning.

But JD said today (Monday) that it expects full-year profits to be “at the upper end” of forecasts after what it called a “consistently positive” performance across the all-important Black Friday and Christmas trading periods.

“To pull off solid like-for-like sales without the kind of heavy discounting others have resorted to is impressive; indeed something of a miracle in the current environment,” wrote Markets.com analyst Neil Wilson.

So what has JD done to incubate itself from what billionaire Sports Direct International PLC (LON:SPD) boss Mike  Ashley described as the “worst November for retailers in living memory”?

JD sells what people want

Analysts are almost all in agreement: it’s the product.

JD has tapped in to the lucrative and seemingly resilient athleisure trend, and its exclusive deals with brands such as Nike make its stores the go-to shop for those in search of new trainers or joggers.

The FTSE 250 group has also spent a great deal of time and money making its stores more female-friendly, recently signing up edgy pop stars Anne-Marie and Ella Eyre to its growing list of ambassadors.

“If you’ve got the right product, shoppers will come to you whatever the weather,” said Shore Capital analyst Greg Lawless.

“JD has the right product, in the right place and when the customer wants it, and if you do that, you can make money.”

Markets.com’s Wilson agreed: “It just goes to show if you get the product offering and pricing right and tap into what consumers want, then there is still success to be found.”

Well-managed stock

The popularity of the products it is selling means the retailer doesn’t need to slash prices like some of its peers, which preserves margins and, therefore, profits.

Lawless explains using an analogy of a pyramid: “Selfridges gets the very top of that pyramid, but JD gets the next tranche down, while Sports Direct gets the bottom left-hand corner.

“Because these [second tranche] products are in such high demand, you don’t then need to discount. Other retailers have had too much product and the only way to entice people into the stores is by discounting, whereas JD clearly has a customer who wants their fashion product and is willing to pay full price for it.”

US the big opportunity and challenge

Another way to manage the fallout of Brexit Britain is to look abroad for growth, which JD did with the “transformational” £400mln of US chain Finish Line last September.

Bosses said they have been “encouraged” by the progress made across the pond so far, so much so that they are rebranding another 15 stores with the JD fascia over the next few months.

AJ Bell investment director thinks the US is one of, if not the, biggest opportunity for JD, although he acknowledges that it also presents one of the greatest challenges.

“The other key challenge for the company will be proving its acquisition of the US Finish Line business is not the step too far it is perceived to be in some quarters.

“Finish Line does give the company a foothold in a potentially huge market but it also a business which has been struggling badly for a number of years. The US has also proved to be a graveyard for many UK retailers’ ambitions in the past.”

Looks cheap versus peers

So where does all this leave JD in terms of valuation? Well, it still “looks cheap” compared to peers, says Shore Capital’s Greg Lawless, even after Monday’s share price jump.

“The company’s stock trades on a forward one year (year to January 2020) multiple of 13.0x PE and an EV/EBITDA multiple of 7.8x, which we believe is totally undemanding given the recent US acquisition and international expansion prospects,” the analyst wrote in a note to clients.

Lawless has the stock as a ‘buy’, even though the stock is currently valued at just shy of £4.5bn, leaving it within touching distance of the FTSE 100 as well as retail stalwart Marks and Spencer Group Plc (LON:MKS).

JD shares gained 7.3% on Monday to sit at 425.4p, valuing the company at around £4.3bn.

Quick facts: JD Sports Fashion PLC

Price: 658.2 GBX

LSE:JD.
Market: LSE
Market Cap: £6.41 billion
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