22nd Sep 2022 17:45
(Alliance News) - JD Sports Fashion PLC shares fell on Thursday, after it reported a drop in interim profit, but analysts were undeterred, as they maintained their "Buy" recommendations.
In the six months to July 30, pretax profit dropped to GBP298.3 million from GBP364.6 million.
The Lancashire-based Sportswear retailer explained the fall in profit was due to the previous year experiencing a one-off benefit in the US from government stimulus.
Revenue, meanwhile, rose to GBP4.42 billion from GBP3.89 billion a year previous.
Its share closed down 5.5% to 117.05 pence each in London on Thursday.
Nonetheless, its performance largely seemed to impress analysts. Shore Capital dubbed the share price weakness an "opportunity". It hailed the firm's "consistency in delivering against market expectations and its profit focus".
"JD Sports Fashion continues to perform well on all fronts," Peel Hunt concurred, adding: "Europe was a particular eye-catcher in the consensus-matching interim profit before tax of GBP383 million printed this morning, but against tough comps, UK and US held up well."
The firm noted a "robust" performance in the UK and Republic of Ireland, but nonetheless posted a decline in pretax profit for the sports fashion retail business. Profit fell to GBP153.0 million, down from GBP174.2 million the previous year.
In Europe, the business swung to a profit of GBP57.1 million from a loss of GBP7.2 million.
In North America, profit fell to GBP130.4 million from GBP245.5 million. The firm noted the "non-comparability" of trading conditions due to a lack of US government stimulus it received a year ago for the fall.
Looking ahead, the company expects its pretax profit for the year as a whole to be in line with the record performance for the year that ended this past January 29. JD Sports reinstated an interim dividend of 0.13 pence per share.
However, Chair Andrew Higginson sounded a note of caution for trading in the second half, "given the widespread macro-economic uncertainty, inflationary pressures and the potential for further disruption to the supply chain with industrial action a continuing risk in many markets".
"Life could get a lot tougher for JD Sports given the significant headwinds facing retailers. With interest rates set to keep going up for the foreseeable future and consumers starting to feel less confident about job security given the dark clouds over the economy, JD is going to need some highly desirable products on its shelves or its second-half results won’t be a patch on the first-half," said AJ Bell investment director, Russ Mould.
Mould points to unemployment levels as being crucial to watch for the retailer. "JD sells a lot of goods to young adults, many of whom work in the leisure and retail sectors, areas which could be susceptible to job cuts if the economy goes into a serious downturn," he explains.
The UK jobless rate edged down to 3.6% in the three months to July, from 3.8% in the previous three-month period, reaching its lowest since May to July 1974. However, UK workers saw a real terms total pay cut of 2.6%.
The Bank of England also warned on Thursday that a UK recession could come as soon as the current quarter, predicting gross domestic product to fall 0.1% in the third quarter. This was as it hiked the bank rate by 50 basis points to 2.25%.
Nonetheless, there is hope for the sports retailer, which could be well served in looking past near-term headwinds.
"It is investing in stores to make them look smarter, thereby strengthening its appeal to shoppers who want to own the latest must-have trainers and be seen to shop in the best-looking places...This should serve the company well in the long term as many of its rivals are likely to be fretting about the current conditions and risk losing market share if they get scared," Mould said.
Swiss bank UBS branded pretax profit "a little light", but with full year guidance reaffirmed, and "a good start to the second half", it holds the stock at a "buy" rating.
Peel Hunt is of a similar mind, with the broker commenting: "In our view the shares do not reflect the strength of JD Sports Fashion's global position and its cash pile. On a [price-to-earnings ratio of under 10 times], the shares are right at the top of our Buy list."
By Elizabeth Winter; [email protected]
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