Sports retailer confident enough to predict full-year profit levels

Bury-based sports and athleisure retailer JD Sports felt the impact of coronavirus lockdown on its trading in the half year to August 1, but said it has traded through and is expecting pre-tax profits for the full year of at least £265m.

Total group revenues for the year were £2.555bn, compared with £2.721bn the previous year, while pre-tax profits of £41.5m were down on the £129.9m achieved in 2019.

While no interim dividend is recommended, the group had net cash at the period end of £765m, against £118m the previous year.

The group said it had significant retention of sales through the unprecedented period of global uncertainty and temporary store closures consequent to the COVID-19 pandemic which reflects consumers’ fundamental affinity and loyalty to the JD brand.

The rreduction in profitability arose as a result of the extra costs associated with the shift in revenues to online channels, particularly during the period of temporary store closures.

JD enjoyed an excellent performance in the US with Finish Line and JD capitalising fully on the enhanced consumer demand consequent to the US Government fiscal stimulus which expired on July 31.

It made further investments at the Kingsway warehouse in Rochdale to counteract the operational impact of social distancing and to enhance online fulfilment processes, and a small test warehouse in Belgium is now operational, providing significant learnings which are being used to shape the group’s long term supply chain strategy for Europe.

Chief executive Peter Cowgill said: “Throughout the COVID-19 pandemic, our priorities have been to ensure the safety of our colleagues and customers, to preserve financial resources and limit the impact on profitability.

“Continuing outbreaks of the virus and periodic strengthening of public safety measures in a number of our global territories, including forced temporary store closures and the ongoing requirement to maintain strict social distancing in our warehouses, makes us cognisant that further challenges lie ahead.

“Ultimately, given the unique circumstances of this trading period, we are reassured by the strength of the JD brand as demonstrated by the retention of more than 90% of the total revenues.

“However, it should be recognised that this has necessitated additional costs principally relating to the provision of enhanced health and safety measures, in all areas of the business, together with increased costs of online fulfilment, including performance marketing.

“Whilst these additional costs have impacted on the result for the period, the group has retained a significant level of profitability with a profit before tax and exceptional items of £61.9m (2019: £158.6m).”

He added: “We are generally encouraged by our performance since the stores reopened and with our performance in the first few weeks of the second half.
“However, retail footfall remains comparatively weak and the recent strengthening of measures in many countries and the subsequent temporary closure of some stores reminds us that COVID-19 remains an ongoing challenge.

“Nonetheless, we remain absolutely confident in our strengths in consumer engagement, key brand relationships and globally consistent multichannel retail standards.

“These, combined with an agile operational infrastructure, provide us with a robust platform for further positive development.”

Mr Cowgill said: “We also believe that it is appropriate for the group to reinstate guidance for the full year.

“Assuming a prudent but realistic set of assumptions for the peak trading period that reflect an uncertain outlook for consumer confidence, the ongoing challenges of attracting footfall to stores and the potential for further operational restrictions, we would presently anticipate delivering a headline profit before tax for the full year of at least £265m, when calculated under IFRS 16 ‘Leases’.”

Shares in the group jumped from an opening price of 724.60p per share to 789p per share in the first 20 minutes of trading. By mid-morning they had settled to 780.40p per share, giving the group a market capitalisation of £7.55bn.

Russ Mould, investment director at Manchester investment platform AJ Bell, said: “In the last decade or so JD Sports has been the star turn in the retail sector.

“It has shown its rivals a clean set of heels as it identified and targeted a youthful demographic with disposable income and tapped into the athleisure trend of wearing trainers and tracksuits to socialise, work and work out.

“Agreements with sought-after brands like Adidas and Nike have helped reinforce its position. These strengths were to the fore as it only reported a seven per cent drop in sales year-on-year in the six months to 1 August.

“When you consider this performance coincided almost exactly with the onset of the coronavirus pandemic, that is a notable achievement and has the coda that full-year profit guidance is above expectations.

“The simple fact of restoring guidance, in itself, will reassure the market.

“It demonstrates that JD Sports is on top of the things you need to be a successful retailer in the 2020s, in particular being able to sell its product as readily online as it does in its shops.

“The big shift to web-based sales did bring with it extra costs, so profit dropped a lot more than revenue. However, the business has adapted creditably to an unprecedented set of circumstances.

“What comes after the current financial year is open to question. Part of its target market could be vulnerable to unemployment, particularly assuming the furlough scheme in the UK ends as planned in October.

“But with the company’s clear retail expertise and a very strong balance sheet it should be a sector survivor.”