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Can JD Sports winner continue its momentum?

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With a 34% gain in January, UK sportswear retailer JD Sports [LON:JD.] has surged to the top of the leader board for FTSE100 risers year to date. After a battering in 2022, as recession fears loomed large over the retail sector, JD has returned to form, with its latest results coming in much better than expected. Here, we take a look at why the purveyor of tracksuits and trainers has done so well, and importantly, whether its recent run-up can continue.

JD Sports shares rally

Overly pessimistic sentiment is a good starting point for any stock to rally. With fears over inflation, penny-pinching consumers and a general recession, UK discretionary retailers suffered falling share prices in 2022, as the market anticipated a steep earnings decline for many non-essential retailers. However, this pessimistic sentiment has been met with a slightly brighter reality, as unemployment rates have remained at record lows and spending across the all-important Christmas period of 2022 was better than anticipated.


In the case of JD, results were significantly better than the market anticipated, with 20% growth seen in the six-week period to Christmas compared to the prior year, reflecting a total of 10% growth in the second half of 2022 compared to the second half of 2021. Resilient growth was seen across all markets, with notable strength in the newly established US retailing arm. This strength allowed JD to report profit before tax expectations in the ‘upper end’ of its GBP933m to GBP985m forecast.

Guidance for the year ahead also came in very strong for the retailer, with the company boldly stating pre-tax profit in 2023 will be in excess of GBP1bn.

Peer outperformance

JD fared significantly better than most companies within the apparel retail sector at the end of 2022. A cross section of London-listed peers (who have reported results in the first few weeks of the year) showed JD’s trading to have outperformed by a wide margin.

Source: Company results

In a year with supply-chain issues and delays to delivery services due to postal strikes, online-only retailers, such as Asos and Boohoo, faced sales declines compared to the prior year. Such postal strikes encouraged foot traffic to the high street, an area in which JD has significant strength.

But compared to other high-street retailers such as Next [LON:NXT], JD’s source of outperformance is likely due to its target demographic. Unlike most of the high-street retailers below, JD’s core demographic is 16- to 24-year olds. Given this demographic often lives under the roof of their parents, they are significantly insulated from cost inflation seen in other areas of the economy, such as utility bills and food costs. On the other hand, this demographic has also benefitted from wage increases, as labour shortages have increased wages in many parts of the economy where younger workers are employed. This dynamic has created a very resilient consumer for JD, one intent on spending more on things important to them, such as the latest pair of trainers.

Supply chain improvement

With retail locations across the globe, JD incurs a significant cost within its supply chain to receive, distribute and supply goods to its retail sites. With container freight prices returning back to pre-Covid lows and supply-chain bottlenecks easing, JD is likely to see improvements in gross margins as cost inflation begins to unwind.

This situation can also be seen with the likes of its largest supplier Nike, which returned to full levels of supply for its wholesale partners after supply bottlenecks eased. Also worth noting is the surge in inventory levels for the footwear supplier, up 43% in the third quarter of 2022 compared to the prior year. Such high inventory levels suggest JD could receive inventory at reduced prices across the coming year.

Matt Friend, Nike’s [NYSE:NKE] CFO said recently on an earnings call for 3Q22: “You’ll recall that we’ve been starving the 18 wholesale channels for six-to-eight quarters because of supply constraints. And so we’re seeing strong demand as we go back into our wholesale partners with available supply.”

JD Sports opened trading today (26th January) at 162.7p and has offered a 29.5% year-to-date return, with a -10.5% one-year return. Its shares have ranged between 88.4p and 194.5p over a 52-week period and the company has a market capitalisation of GBP8.3bn.

JD Sports valuation and outlook

There is no doubt 2023 still casts a challenging outlook for the retail sector, as consumers choose carefully where to spend in light of increased household costs. However, JD remains well insulated from the pressures of the current cost of living crisis through its healthy focus on a younger demographic. The company has forecast continued growth in 2023, and its profit forecast suggests the business trades on a valuation of 8.3x profit before tax or a price to earnings ratio of 13x forecast earnings in 2023.

Having spent much of the last three years trading at a valuation nearer 30x earnings, it isn’t hard to envision that JD’s valuation will be a few turns higher by the end of the year.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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