England’s early exit from the football World Cup in Brazil will not just be mourned by fans of the Three Lions. Retailer JD Sports Fashion (JD.) is also likely to be counting the cost. We believe stores will be left with unsold World Cup-related stock as interest has quickly waned.

The market backdrop is also negative. With increased retail competition, tough year-on-year comparative sales figures to beat and interest rate rise speculation putting pressure on consumer spending, the shares looked primed for a downwards correction ahead of half-year results (17 Sep).

Interest in the World Cup from casual fans more focused on following England than the football itself is likely to have fallen off a cliff after defeat against Uruguay (19 Jun). The match against Costa Rica attracted a paltry 5.8 million TV viewers, the lowest total for an England World Cup match on record.

A trading statement (17 Jun) indicated the build up to the tournament had enhanced JD’s trading performance of its core sports arm in the first 18 weeks of its financial year running to 7 June. In fact it distorted sales comparisons to such an extent the company declined to offer a like-for-like figure. It is a fair assumption that if the build up to the World Cup can act as a boon, the weakest performance by an England team in history could act as a material headwind, particularly if JD had become over-optimistic about the potential level of demand for merchandise.

Wider reservations

The World Cup fears add to Shares’ concerns about the business. We believe the market has not fully appreciated the competitive threat from its value-focused rival Sports Direct International (SPD). The latter is fighting JD Sports hard for market share in the UK sports and fashion arenas and could increasingly encroach on the mainland European territories from which JD Sports is currently deriving growth. A plan to roll-out Sports Direct concessions across Debenhams (DEB) department stores is likely to add to this pressure.

The fashion business - encompassing the Bank, Scotts and Tesutti outlets - continues to be affected by the shift in the youth fashion sector to online retailers. The restructuring and turnaround of its outdoor division, which includes brands Blacks and Millets, is progressing, with the company saying in April it finally reached break even in the second half of the last financial year. But further setbacks cannot be ruled out given the fragile nature of the recovery.

We have corporate governance concerns given the departure in May of long-serving chief executive officer Barry Bown. This leaves Peter Cowgill as executive chairman with no plans for a replacement CEO. We are also concerned the interests of minority shareholders could be compromised as majority shareholder Pentland, the private owner of brands like Berghaus and Speedo, owns 57% of the group. Pentland’s presence on the register likely spared the company from a more serious revolt on its pay policy. In the event 12% of shareholders voted against a plan (26 Jun) which included a 54% pay rise for Cowgill last year to £3.1 million.

JD Sports Fashion (JD.) 405p SELL
Stop loss: 486p

Market value: £788 million

Prospective Feb 2015: 12.9

Prospective PE Feb 2016: 11.7

1-month relative strength: 0.1%

1-year relative strength: 67.7%

Prospective dividend yield: 1.7%

Bid/offer spread: 0.4%

Growth: MEDIUM

There is some scope for overseas expansion and a recovery in the fashion and outdoor arms.

Risk: HIGH

There is a real risk JD will disappoint as the wider environment deteriorates particularly given the World Cup disappointment.

Quality: LOW

Margins are falling and fierce competition could trigger price wars.