- Trading environment ‘volatile’
- Weak Q3 growth
- Billion pound club admission may have to wait
Trainers-to-tracksuits seller JD Sports Fashion (JD.) now expects year-to-January 2025 pre-tax profits will be at the lower end of its original £955 million to £1.035 billion guidance range, disappointing news that sent the shares tumbling 16% to a two-year low of 95.2p.
The global footwear seller had been on course to join UK retail’s exclusive £1 billion profit club but the latest update suggests JD Sports Fashion might just be left loitering on its fringes, barring a stunning sales uplift this Christmas.
The company blamed ‘increased trading volatility’ in October for the downgrade, highlighting a US slowdown and continued weakness in the UK, although CEO Regis Schultz insisted his charge remain ‘well positioned’ for the upcoming peak selling season.
LIKE-FOR-LIKE SLOWDOWN
Like-for-like sales were down 0.3% in the third quarter to 2 November 2024, a slowdown from the 2.4% growth seen in Q2.
A good August and September period was offset by a softer October, with stores continuing to outperform online and footwear outperforming apparel.
As Schultz explained: ‘After a good start to the period, helped by strong back-to-school sales, we saw increased trading volatility in October, particularly in North America and the UK, reflecting elevated promotional activity and mild weather.’
JD Sports witnessed much softer consumer demand and trading toward the end of the quarter due to higher levels of discounting and unseasonal weather, which would have affected demand for higher ticket items like puffer jackets.
The company also called out consumer caution in the US where demand was suppressed ahead of the election, although just how much uncertainty over the presidential race would affect demand for trainers seems open to question.
MARGIN GAINS
While like-for-like sales were down in North America, the UK and Asia Pacific, they were up in Europe and JD Sports still managed to improve its gross margin by 30 basis points to 48.1%.
‘In addition, we made further, strong progress on our long-term growth strategy including opening 79 new JD stores across the world’, added Schultz.
The total number of stores at the period end was 4,541, up 1,224 from the start of the year, including 1,179 stores acquired with US sporting goods supplier Hibbett, which is expected to deliver about £25 million to pre-tax profit.
BROKER VIEWS
Shore Capital trimmed its full year pre-tax profit estimate by 3% to £960 million on the news, though the broker noted that earnings growth is still anticipated for the year to January 2026 and held firm with its ‘buy’ rating on the stock.
‘We cannot pretend that we are overjoyed to be bringing down our JD Sports pre-tax profit estimate albeit we reiterate that the firm is being guided to deliver within management’s pre-existing range, which is important to point out,’ commented the broker.
JD Sports’ shares have been weak recently, noted Shore Capital, ‘reflecting low market confidence, we sense, going into this update. That said, the group is growing, operating stores to high standards, and has the benefit of (French franchise) Courir and Hibbett yet to harvest. Being international in scope, it is less vulnerable to the naivety and deceptions of the new UK Government.’
Panmure Liberum explained that while the lowly valuation builds in a discount for risks around execution of acquisitions and an aggressive expansion strategy at a time of a slowdown at JD Sports’ biggest brand partner Nike (NKE:NYSE), there has been ‘a recent overreaction against the stock on fears of the impact of the UK budget and the risk of US tariffs on China, which we think is less material for the sneakers market and a bigger risk for apparel and JD has a lower apparel mix at less than 20% in the US.’
The broker is sticking with its ‘hold’ rating for now, while awaiting ‘improvement in the consumer demand in JD’s end markets and more clarity on the US opportunity from its recent acquisitions.’
