JD Sports still trading well

The latest update from clothier JD Sports shows that the company is performing reasonably well in what is still a difficult market for UK retailers.

Like-for-like sales at its sports stores in the UK and Ireland were up 7% for the 18 weeks to 8 June, but the fashion division saw a drop of 5% over the same period. This means that the division will have to report an increased loss for the first half of the year. The situation was even worse in the outdoor arm, where a modest increase in sales was achieved only at the cost of a sharp drop in margins. Improvement is still forecast however, with investment efforts and cost-cutting expected to yield benefits in the second half.[1]

Recent consumer price index figures indicate that there is still a worrying pressure on the retail sector in the UK. However, there is reason to believe that JD Sports will be able to weather this storm, given that its main business is still doing well, indicating a strong degree of brand loyalty among its customers. The demise of rival JJB Sports will also have a positive effect, reducing competition on the high street and giving JD more room for manoeuvre on margins.

In addition, the shares remain attractive on valuation grounds. For a retailer, the shares offer a decent yield of around 2.8%, and JD Sports has shown a commendable dedication to regular increases in dividends, with the payout per share rising from 8p per share in 2008 to the current level of 26p per share.[2]

The shares also look attractive on another valuation metric. JD Sports currently trades on a PE multiple of 9.96, residing comfortably in value territory. This indicates that the shares are not currently overpriced on an earnings basis, even though they currently sit only 20p away from their highest level since August 2011.[3] The share price had become significantly depressed in late 2011 and early 2012, as concerns about the broader retail market took hold. At that time JD was still competing with JJB Sports and also with Blacks Leisure, which it later absorbed, so investors had become relatively pessimistic about the company’s prospects. Now, however, with JJB gone and Blacks absorbed by JD (the costs of which have now been factored in), the environment is much less competitive.

If JD Sports can continue to show improvement in its core sports business then investors will be able to retain confidence in the firm, despite the somewhat grim consumer outlook. With the current uptrend still intact, and valuations compelling, the shares remain a ‘buy’ with an initial target of around 930p and 1000p still a possibility in the medium-term.

JD Sports Fashion plc chart

Sources

1. Investegate
2. IG data
3. IG Advanced Charts

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