JD Sports Fashion remains confident it can achieve last year’s record performance but is that optimism misplaced?
Today’s interim results were in line with the board’s expectations, albeit profit before tax and exceptional items slipped in the first half due to it receiving a one-off fiscal boost in the US last year.
And while it reassured investors it remains on track to match last year’s record profit before tax and exceptional items of £947.2mln, it may not be immune to the tough times that lie ahead.
Its long-term approach and its key demographic being more susceptible to potentially becoming unemployed are two of the main concerns some industry experts have surrounding the FTSE 100 retailer.
Is unemployment a concern?
Figures from Statista, a market and consumer data company noted that roughly 9.1% of people aged between 16 to 24 were unemployed in the UK in the three months to July 2022.
16 to 24-year-olds make up a large chunk of JD’s target audience, and unemployment levels in that age group are something it should be keeping an eye on.
The argument is that many of the young adults that JD sells to tend to work in jobs and sectors dominated by younger people, such as hospitality, leisure and retail, all of which are susceptible to job cuts should the economy tank.
However, Julie Palmer, a partner at corporate restructuring firm Begbies Traynor (AIM:BEG) suggests otherwise, and while unemployment among 16 to 24-year-olds is larger than any other age group, further job losses shouldn’t be a concern for a couple of reasons.
“They (16 to 24) are all in sectors where there’s a massive sort of skills gap at the moment, so it's not as if there is any sort of unemployment risk there.”
Additionally, Palmer argues that many young adults live with their parents, so are not burdened with soaring energy bills, perhaps giving them more cash to spend.
Long-term v Short term
Russ Mould, an investment director at AJ Bell noted that “life could get a lot tougher for JD Sports given the significant headwinds facing retailers.”
Input cost inflation, supply chain disruptions and the cost-of-living crisis are all short to medium-term issues, but JD seems adamant about focusing on its longer-term opportunities.
Although it is strengthening its appeal to shoppers through investment in its stores, making them look smarter, it may be at the cost of neglecting some of the near-term headwinds.
“This should serve the company well in the long term,” said Mould, “but JD still needs to be prepared for a tough period in the coming months and continue to keep an eye on the money coming in and going out.”
However, Palmer takes a different standpoint and believes the investment in the stores, although a “bold move” is a necessary one even in the short term.
“You can’t really rest on your laurels in retail, so if you aren’t spending on keeping the stores current, you risk falling behind the trend.”
JD like all retailers will need to carefully manage its balance sheet over the next six to 18 months, but given its position as a sector leader, it should be better equipped than most to navigate the tricky waters.