JD Sports kicks off new upgrade cycle

Shares in JD Sports Fashion (JD.) tumbled two months ago following a low-key trading update, prompting us to ask whether the 14% sell-off in shares from record highs was overdone. Now, the tracksuits-to-trainers chain has answered the question with cracking first-half trading numbers and bullish outlook.

While chairman Peter Cowgill said in that June update he was confident of hitting full-year 2017 targets, his update lacked the bells and whistles investors had come to expect. Combined with a perceived slowdown in UK consumer spending and the bear case was building.

Indeed, investors could have bought JD shares up for as little £3 at the end of August, a 10-month low. That’s because interims released today were expected to see earnings momentum stall. It didn’t. Instead, Cowgill boasted of yet another record first-half.

Pre-tax profit jumped by a third to £102.7 million in the 26 weeks ended 29 July on revenues up 41% to £1.37 billion. Earnings per share (EPS) jumped 36% to 8.09p. The weak pound increased import costs, crimping margins, although this had already been priced into expectations.

May’s acquisition of Go Outdoors helped JD’s Outdoor division deliver a positive first-half result for the first time ever, with an operating profit of £100,000 compared to a £2.3 million loss a year ago.

The second-half has started encouragingly, too, with sales at similar levels to those seen in the first six months. Full-year profits are now expected to be at the upper end of market expectations, we’re told.

Cantor Fitzgerald’s Mark Photiades now pencils in full-year pre-tax profit of £285 million, which would be 16% higher than 2016.

In truth, it should have been entirely predictable. Historically, JD coasts through the first half before upgrades kick in through the important winter months, including the key Christmas period. Panmure Gordon analyst Peter Smedley notes JD’s profit split is typically weighted 65:35 towards H2.

Those shrewd enough to get in at 300p are sitting pretty. JD shares surged as much as 12% to 384p Tuesday, giving a maximum return of 28% in just a fortnight.

Brokers upped forecasts for 2018 and 2019 by 2%-5%, “potentially triggering a new wave of the powerful positive earnings momentum” that has driven the stock in recent years, according to Smedley.

Investors should, of course, understand the risks, among them an increasingly competitive ‘athleisure’ market including players like Nike/Adidas, Zalando/Amazon (AMZN) and ASOS (ASC)/boohoo (BOO).

However, consensus opinion is that the long-term bull case remains intact. JD continues its international expansion, with 40 new stores opened in the half-year and a similar number planned for the next six months. This, combined with a strengthened digital and multi-channel presence, should drive further revenue and operating profit margin growth, argues Smedley.

A forward price/earnings (PE) ratio of around 16 times for the year to January 2018, falling to 14.5 times in 2019, looks attractive for a company positioned to continue to deliver sustainable double-digit earnings growth for the foreseeable future.

Kate Calvert at Investec had already increased her price target in June to 455p. That now goes up again to 475p, implying potential upside of 28%. Photiades keeps his target at £5.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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