Second-quarter sales declined 1.3% on an organic basis to £3.1bn, as double-digit growth in Asia Pacific was more than offset by declines in the UK, Europe and North America. This was largely driven by their core customer demographic struggling with cost-of-living pressures.
Alongside the soft sales performance, elevated promotional activity is expected to continue over the second half, weighing on margins. As a result, full-year adjusted pre-tax profit guidance has been downgraded from £750-850mn to £700-800mn (£780mn expected), and free cash flow guidance maintained at £460-520mn.
£100mn of the ongoing £200mn share buyback programme has been completed.
The shares were down 10.5% in early trading.
Our view
JD Sports’ sales came in weaker than expected as it failed to fully capitalise on the football World Cup. Persistent cost-of-living pressures and intense discounting weighed on performance, and these challenges are expected to continue in the second half, leading to a downgrade in full-year profit guidance.
JD is a sports apparel giant, with more than 4,800 stores across 51 different countries. Acquisitions in the US and France in recent years have massively expanded the group’s footprint. The focus is now on leveraging the cost efficiencies that this increased scale can bring.
The near-term outlook remains challenging, though. The sportswear industry is grappling with limited product innovation, resulting in weaker demand and a subdued growth outlook. Until the product pipeline improves, industry growth is likely to remain under pressure.
JD also faces an additional challenge. Its core customers are typically 16-24, a group more exposed to cost-of-living pressures and weaker employment conditions than the wider workforce. That leaves less disposable income available for discretionary purchases such as sportswear and trainers.
North America is JD Sports’ largest region, accounting for 35% of total sales. Its performance here has been particularly weak of late, driven by tough competition and a lack of new product launches, especially in footwear.
In the UK, with a more mature store estate and tougher consumer backdrop, sales have continued to decline. The group i’s transitioning to fewer but bigger and better stores to improve its offering to customers. Although we support the strategy, we remain cautious about the broader outlook for the UK economy.
The Middle East conflict hasn’t had a direct impact on JD, given its lack of presence in the region. But we’re mindful of the knock-on effects from higher energy prices. Given that JD sells discretionary items, if the economic outlook deteriorates, JD’s sales are likely to suffer more than some other areas of retail.
That’s already beginning to play out, leading to softer sales and margin pressure. As a result, full-year adjusted profit guidance has been downgraded by £50mn to between £700-800mn. But the group’s managing its cash flows well, which is helping to support increased shareholder payouts. But as always, these aren’t guaranteed.
JD has a strong market position and continues to generate impressive cash flows. The valuation has come under pressure in recent years, and the current multiple now reflects the lower growth outlook. We still see long-term potential as focus shifts from expansion to squeezing the most out of its existing stores. But near term, the broader economic picture remains challenging for its key customers, and it could be some time before the industry's outlook improves.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means that human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, JD Sports’ management of ESG risk is strong.
The group’s environmental policy is strong, and executive remuneration is explicitly linked to sustainability performance targets. There is also an adequate whistleblower policy in place. However, ESG reporting and disclosures fall short of best practice.
JD Sports key facts
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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