JD Sport Fashion PLC (LON:JD.) has “limited scope” to deliver more earnings upgrades in the near future, UBS said after carrying out research into the retailer’s pricing data.
UBS downgraded its rating to ‘neutral’ from ‘buy’ but upped its price target to 860p from 790p in a note to clients on Tuesday after JD’s shares more than doubled last year, propelling the former group into the FTSE 100.
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With the shares now trading at 22 times forward earnings, UBS suggested “further share price upside requires earnings upgrades”, which would most likely need to be driven by the UK and or last year’s US acquisitions of the Finish Line that together make up around 80% of group underlying profits.
“We see limited scope for both,” UBS analysts said, given that the UK business needs to beat comparative like-for-like growth of at least 10% in the first half of the new year, that UK wage inflation is set to rise and that the City consensus already forecasts 4.0 percentage points of gross profit margin expansion at Finish Line over the next four years.
“Upgrades would require Finish Line to exceed its medium-term gross margin target,” but UBS said its ‘Evidence Lab’ research suggests “it might be too soon” to conclude this key debate.
While it is “feasible” that Finish Line beats its margin expansion target, given that its margin is still well below peak and even further below JD’s UK profit margins, UBS is keeping it forecasts in-line with company’s more modest guidance.
This is because while recent Finish Line pricing data shows a more beneficial apparel mix is accelerating month-on-month, the rate at which promotions are falling has also eased
UBS raised its 2020 PBT forecast by 3% to £444mln, but less than 1% for subsequent years.