JD Sports Fashion plc (JD.) ORD GBP0.0005

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JD Sports’ organic sales growth slowed to 5.4% in the third quarter, down from the 6.1% growth seen year-to-date. Performance was mixed as growth slowed across North America and Asia Pacific, while declines narrowed in the UK, and growth improved slightly in Europe.

A strong start to the quarter, helped by back-to-school sales, was offset by “trading volatility in October” as promotional activity increased in the sector.

Its acquisition of French brand Courir is set to “complete shortly” as all regulator conditions have now been satisfied.

Full-year pre-tax profits are now expected to be at the lower end of its previously lowered £955-1,035mn guidance.

The shares fell 13.7% in early trading.

Our view

JD Sports’ sales growth slowed in the third quarter, deciding to hold firmer on pricing than its competitors. That’s helped lift margins a little but means full-year profits are set to land at the lower end of previously lowered guidance, which markets didn’t react kindly to on the day.

The trading environment remains volatile, but recent cold weather should be a tailwind for JD heading into the peak season. Cost control is likely to remain a focus in the near term, and where demand trends from here will be key.

Looking past this softness, there’s a lot to like structurally about the market that JD operates in. The global sports apparel market is huge – valued at $396bn in 2023 and expected to grow to $544bn by 2028.

To service all this demand, JD’s continuing to expand its footprint through acquisitions and new store openings. The US-based Hibbett acquisition was substantial, further strengthening the group’s foothold in the world’s largest sportswear market. The acquisition of France-based Courir is set to complete in November, adding more exposure to the group’s fastest-growing region.

Filling the racks in these stores are exclusive items from the likes of Nike and Adidas. JD is known for its strong brand relationships and is even Nike’s single largest partner globally. Being able to offer these ‘JD Exclusives’ helps to lure customers into stores and boost market share.

The group’s sales mix by region is also better balanced than some of its biggest competitors, which helps smooth out bumps in the road if one market slows. With UK sales having a disappointing start to the year, this diversity is helping to keep growth targets alive. And because the group sits at the premium end of the market, it typically has healthier margins than many of its peers too.

But JD Sports faces challenges. CEO Régis Schultz hasn’t shied away from ambitious expansion plans in North America and Europe, but growth isn’t coming cheap. Its strong balance sheet means there isn’t currently cause for concern, but £0.5bn of additional capital spend for store expansion and the latest Courir deal does increase the pressure to keep running harder.

JD Sports' strategy execution is impressive and the growth opportunities are evident. But, with consumer sentiment and demand still uncertain, the company is taking a risk by expanding capacity ahead of market recovery.

The company’s valued at just 7.6 times forward earnings, significantly below its long-run average. This reflects recent disappointments and uncertainty surrounding the retail sector in the near term, so more ups and downs could lie ahead. But in the long term, we think the current valuation overlooks the company’s strong revenue and profit growth prospects.

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 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.

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 Refinitiv. 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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