Boosted by sales of trainers in the US and the ongoing demand for athleisure, British sports apparel retailer JD Sports reported record earnings for the first half of the year. On the back of the news, the company’s shares reached historic heights.
The business “continues to demonstrate outstanding resilience in the face of numerous challenges” from the pandemic, said the retailer’s executive chair Peter Cowgill during the corporate financial update.
In the six months to July, 31, JD Sports Group’s profit before tax and exceptional items rose to 439.5 million pounds, over three-fold the earnings the company announced in the comparable period in 2019 and substantially higher than the 61.9 million pounds from the same period last year. The company now forecasts profit before tax for the full year of at least 750 million pounds.
Susannah Streeter, senior investment and markets analyst and Hargreaves Lansdown highlighted in a market note that “Demand for trainers and the trend for athleisure wear shows little sign of going out of fashion. Casual styles are en vogue not just for free time but increasingly while at work too, with so many people still using their home as their office.”
Looking ahead, Streeter added that ‘’JD Sports’ scoresheet has notched up plenty more wins as lockdowns have eased, with record earnings for the first half, cementing its position as a star on the retail sportswear scene, but supply chain issues could still trip up sales in the coming months.”
Consumers in the US using stimulus check to buy sports shoes
Jonathan Pritchard, analyst at Peel Hunt, said JD Sports’ expansion into the US had been “the seminal moment in the company’s history”. It’s worth recalling that JD Sports made a number of acquisitions in 2020 that helped expand its presence in the American market.
JD Group said all US businesses benefited from the US government’s fiscal stimulus package which gave direct payments to individuals, much of which was spent in stores. The group’s executive chairman, Peter Cowgill, added that JD outlets had performed particularly well thanks to their understanding of their customers’ “aspirations and expectations”.
Pretax profits before exceptional items, more than tripled (up to 245 million pounds in the US) partly thanks to acquiring Shoe Palace and DTLR businesses. “It is clear that the US is becoming an increasingly important territory for the group with progression and evolution in this country having a major impact both on the group’s overall performance and its standing with the international brands,” the company said in a financial statement.
“The sports leisure market in the US is huge and here JD Sports is stepping up the pace of sales, which will be key to future growth prospects. It’s already the group’s most profitable territory, thanks to multiple acquisitions and rebranding of stores. It’s also been a big beneficiary of the Biden bounce of stimulus cheques, with recipients splashing the cash on coveted sneakers and sportswear,” pointed out the Hargreaves Lansdown’s analyst.
However, “JD retains a cautionary stance,” said Richard Hunter, head of markets at fund supermarket Interactive Investor. “Apart from the fact that the stimulus in the US will not be repeated, the company is mindful of the possibility of further restrictions being imposed on the back of the Delta variant,” he added. Caution about future show on JD Sports’ dividend In the UK and Ireland, online sales increased in the first quarter while lockdowns kept some shops closed. There was strong demand once stores reopened. However, footfall has not returned in all markets.
The retailer’s first executive noted “widespread strain on international logistics [and] materially lower levels of footfall into stores in many countries”. In the same vein, the company cited as well the impact of Brexit and the “cost consequences resulting from the loss of tariff free, frictionless trade with the European Union”. To this point, Peel Hunter’s expert calculates that those consequences would “probably cost [the company] 40 million pounds in duties this year”.
Ongoing pandemic restrictions and changing consumer preferences and behaviours means footfall in stores remains weak in many key markets, reminds Streeter. “Despite its slick operating model, and investing big in its logistics operation, it’s not immune to supply chain challenges. The administrative burden of Brexit has also disrupted performance in Western Europe which it is hoping to solve temporarily through a short term lease on a huge online order processing factory in Lille. Supply chain problems have caused a particular headache for the company’s outdoor brands with delays in bike and cycling accessories in particular, leading to shortfalls in stock.”
Factoring all of that in, JD is withholding an interim dividend, with suggestions of a larger full year dividend. “There is a risk that with such challenges playing out, a game of two halves could materialise with a weaker performance in the current six month period,” warns Streeter.