EXTRA: Soft October trade dashes JD Sports GBP1 billion sales dream

(Alliance News) - A "disappointing" trading update sent shares in JD Sports Fashion PLC tumbling, as "ever more event driven" consumers steered clear of purchases ahead of Black Friday.

On Thursday, the athleisure retailer predicted annual profit will be at the lower end of guidance, as a decent start to its third-quarter was hampered by a "volatile" October.

Tricky trading conditions were particularly evident in North America and the UK towards the back end of the 13 weeks to November 2, it said.

In the third quarter, like-for-like sales were down 2.4% in the UK, 1.5% in the US and 3.8% in Asia Pacific. Europe defied the slump, with LFL sales in the third quarter up 3.5% on year. Globally, stores continued to outperform online, and footwear continued to outperform apparel on a LFL basis, the company said.

On an organic basis, sales were up by 5.4% in the third-quarter. They were down 0.1% in the UK, but up 5.9% in North America and up 5.0% in Asia-Pacific. Europe again outperformed, with organic sales up 10%.

This left company-wide year-to-date organic sales growth at 6.1%.

Chief Executive Officer Regis Schultz said: "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."

"Against this backdrop, we maintained our commercial discipline, improving gross margin by 0.3% points while still delivering 5.4% organic sales growth."

The CEO added: "We have performed well in the key trading events this year and we are well positioned for the upcoming peak season. The trading environment remains volatile though and, following October trading, we now anticipate full year profit to be at the lower end of our guidance range."

Its pretax profit before adjusting items guidance range stands at GBP955 million to GBP1.04 billion so it still expects an increase from the GBP917.2 million it achieved in the 53 weeks to February 3, its prior financial year. On a 52-week basis to January 27, it achieved profit of GBP912.4 million.

In response, shares in the Bury, England-based firm slumped 14% to 97.70 pence each in London. They are down 32% in the last 12 months.

Broker Citi called the update "disappointing". Organic growth came in below Visible Alpha consensus of 7.7% and was down from 8.3% in the second quarter, with the drop in like-for-like sales missing consensus for growth of 2.4% - the same pace of growth in the second quarter, Citi noted.

Organic growth in North America was below the 9.1% consensus, while growth in the UK had been expected of 2.8%, it added.

JD Sports said the rollout of 79 new stores had boosted organic sales and reported "good progress" on its bid for French sneaker retailer Courir, saying it had satisfied all regulatory conditions and expected to complete the acquisition "shortly".

On a call with analysts, Chief Finance Officer Dominic Platz said he was "hopeful we can complete the deal as early as next week."

US subsidiary Hibbett Inc is still expected to contribute around GBP25 million to pretax profit, with currency reducing pretax profit by GBP15 million based on current exchange rates.

JD Sports completed the USD1.08 billion acquisition of Birmingham, Alabama-based retailer Hibbett back in July.

Barclays said given the share price has been weak since recent mid​-​September peak, it is likely that investors have anticipated softer trading.

At the bottom end of the range would imply low single​-​digit risk to Bloomberg consensus forecasts, it estimated.

The broker noted one area of hope is that other US retailers have mentioned the warmer Autumn weather being unhelpful, but that trading has improved as weather has got colder into November.

On the call, CFO Platz said trading had been "mixed."

He said overall trends across August and September were in line with the second quarter but this was then followed by a "much softer" October.

This reflected a number of factors, including a more cautious consumer tightening their purse strings and some distraction in the lead up to the US election.

He noted the consumer seems to be "ever more event driven these days," noting that October is increasingly a month when consumers start gearing up for Black Friday.

Reflecting on the update, Panmure Liberum thinks this would require a 2% to 3% cut to consensus expectations.

The broker pointed out shares have declined 26% in the last two months and now trade at only the trade at only 7.6x 12 month forward PE multiple.

Aarin Chiekrie, equity analyst, Hargreaves Lansdown said the ‘King of Trainers’ is having to lace up and work hard to drive sales higher.

"JD’s been reluctant to offer the same level of promotion as the competition, which has helped to protect its margins. But it’s also meant sales growth has slowed over the third quarter," he observed.

But looking past this softness, JD’s thinking ahead and continuing to expand its footprint through acquisitions and new store openings.

Chiekrie said JD is taking a risk by expanding capacity ahead of market recovery but it could pay dividends down the line when market conditions and consumer confidence improve.

Dan Coatsworth, investment analyst at AJ Bell noted the update was a blow to the firm's aspirations of scoring GBP1 billion in annual profits.

"Analysts had already taken a cautious view, with the consensus forecast standing at GBP965 million. That figure is likely to be revised downwards as a result of the trading update," he said.

"Theoretically, a decent run over the Black Friday period and leading into Christmas could still help it get over the GBP1 billion line, but that is not a given," he added.

But house broker Peel Hunt felt the share price reaction to what is "no more than a finessing of forecasts for most is extreme".

"October was clearly tough, but unseasonal weather and the US election were external reasons for the slower trading. We do not see the elevated promotional behaviour in the third quarter persisting medium/long term," it added.

Peel Hunt said JD needs 2% like-for-like in the fourth quarter to deliver guidance against easier comparatives, adding the firm has been in "good form" across ‘events’ so far this year.

The shares trade on a "mere" 7x PE, the broker said, "in our view too low for a retailer that is winning market share globally, even if the third quarter was slightly below hopes."

By Jeremy Cutler, Alliance News reporter

Comments and questions to newsroom@alliancenews.com

Copyright 2024 Alliance News Ltd. All Rights Reserved.