JD Sports Fashion Plc has revised its full-year profit forecast, cautioning investors that earnings are now expected to fall at the lower end of its previously estimated range of £955 million to £1,035 million. This announcement led to a sharp decline in its share price, which dropped over 13%.
The downgrade comes after weaker trading in October, during which like-for-like sales turned negative for the group. Key markets, including the UK, North America, and Asia-Pacific, experienced sales declines, while European sales showed a slight improvement.
The retailer highlighted an increasingly volatile trading environment during the quarter, citing challenges such as heightened promotional activity, unseasonably mild autumn weather, and cautious consumer behavior.
Despite these setbacks, analysts at RBC Capital Markets remain optimistic about JD Sports’ position, citing its strong relationships with major sportswear brands like Nike (NYSE:NKE) and Adidas, its appeal to urban and cash-conscious customers, and the potential to enhance its apparel offerings through upgraded store formats.
October’s performance was notably impacted by these challenges, despite a strong start to the quarter driven by back-to-school sales.
In Q3, the group’s like-for-like (LFL) sales declined by 0.3%, with the UK down 2.4%, North America dropping 1.5%, and the Asia-Pacific region falling 3.8%. Europe, however, stood out with a 3.5% increase. Organic sales growth for the quarter reached 5.4%.
Barclays (LON:BARC) analysts observed that JD’s downgraded guidance comes even as foreign exchange pressures have eased. The retailer now anticipates FX to reduce profits by £15 million in the second half, an improvement from the earlier forecast of a £20 million impact.
Barclays projects JD Sports’ profit before tax to reach £979 million, slightly below the Bloomberg consensus estimate of £986 million. Following this update, the consensus could see a low single-digit downward revision.
The company attributed its weaker performance to subdued consumer demand and intensified pricing pressures.
Despite these challenges, JD improved its gross margin by 0.3 percentage points during the period by adhering to “commercial discipline,” though this was insufficient to counteract the broader difficulties.
RBC noted that while governance improvements are becoming evident and should reassure investors, the company’s rapid pace of expansion increases execution risks compared to industry norms.
The results highlight broader challenges in the retail sector, particularly in the US, where unseasonably warm autumn weather has dampened sales for many retailers.
Barclays analysts noted that trading conditions could improve as colder weather arrives, raising hopes for a stronger performance during the peak holiday season.
The latest caution also raises concerns about JD’s ability to significantly improve its free cash flow (FCF) in the coming years.
Barclays highlighted a notable disparity between JD’s FY25 price-to-earnings ratio of 8.6x and its price-to-cash flow ratio of approximately 17x, which translates to a modest free cash flow yield of 6%.
High capital expenditure, driven by new store openings and acquisitions, continues to pressure cash generation, with capex in FY25 expected to be nearly three times depreciation levels.
The cautious outlook reflects broader challenges across the industry and highlights the critical importance of upcoming trading performance to achieve even the revised profit targets.
Barclays analysts remain cautious, maintaining an “underweight” rating on the stock and noting that the lower-end profit growth threshold of 2.5% in JD’s long-term incentive plan (LTIP) signals a conservative approach to capital allocation.
Morgan Stanley (NYSE:MS) analysts commented that the revised guidance is likely to result in similar adjustments to consensus estimates, with the updated target of £955 million suggesting a ~3% reduction in the January 2025 profit before tax (PBT) consensus.
