Nike’s cagey guidance suggests the second half of 2022 will “represent the true test” for JD Sports Fashion PLC (LSE:JD.), analysts said, as it is a key partner of several sportswear giants that are looking to exclude retail middlemen and is managing its own transition from the inglorious exit of chief executive Peter Cowgill.
JD's business model is at a "possible inflexion point", said Credit Suisse, with a potential headwind from bigger brands like Nike to sell more via their own direct-to-consumer (D2C) routes, or could be a beneficiary of fragmenting consumer demand empowering premium multi-brand models such as its own.
The quarterly earnings call from Nike last night flagged strong consumer demand despite supply chain disruptions and rising inflation.
Nike was cautious on its profit margins, expecting a highly promotional summer, and continued to push its direct-to-consumer channel, though acknowledging that consumers will decide where they buy their sneakers, gym kit, work-from-home tracksuit bottoms, etc.
Conscious of the rapidly evolving consumer environment, broker Shore Capital said it has conservatively kept its estimates in line with JD’s guidance, though said the company is “well positioned for a resilient [2023 financial year]”, of which it is already five months deep.
ShoreCap reckons is somewhat insulated from the promotional environment by its differentiated offer.
The second half of 2022 "will represent the true test" for JD's business, said analyst Eleonora Dani, expecting a continuation of trading trends seen in the first half, with comparatives from last year softening and profitability expected to be supported by market consolidation in the US.
Forecasting flat profit before tax and exceptionals of £947mln, Dani kept a ‘buy’ rating on JD’s shares as they are trading at “only 4x EBITDA and with reinforced corporate governance in place”.
Over at Credit Suisse, the compliance issues and length of time before a new CEO is installed “are unwelcome”, but there has been “no sign that operations have been affected and we believe concerns are more than discounted in the current share price”, which has halved since November.
The main concern from this month’s final results was the second-half decline in US profit margins, which are expected to impact the first half of the current year but less so in the second, as inventory levels are almost back to normal.
Analysts at the Swiss bank said that while the attention has been on JD’s US push for the past two years, for the next two it believes “the key will be the recovery potential in Europe,” now COVID restrictions have been eased, post-Brexit supply issues are resolved and the JD format is rolled out.
As JD builds scale in Germany, converts to JD formats in France, and establishes the new model in Iberia and the Netherlands, with further growth via M&A in Eastern Europe, Credit Suisse estimates margins can double in the next three years, adding at least £150mln to group EBIT.
“The model is at a possible inflexion point with a potential headwind from bigger brands going D2C or as a beneficiary of fragmenting demand empowering premium multi-brand models such as JD," CS analyst Simon Irwin said, reiterating his 'outperform' rating and 200p price target.
“So an extended period before a new CEO lays out a new strategy is unwelcome, but we see few signs of execution slipping in the meantime.”