JD Sports shares spike as trading updates shows spike in profits

Shares of British fashion retail company JD Sports (JD.L) were trading sharply higher in early London trading today after the company provided its trading update that showed a spike in profits.

Today, JD Sports released the interim results for the 26 weeks ended 31 July 2021. It reported revenues of £3.88 billion as compared to £2.54 billion in the corresponding period last year. While the spike in revenues looks encouraging, it is coming from a lower base as the retail sector was hit hard by the COVID-19 pandemic last year.

JD Sports reports interim results

JD Sports reported gross profit margins of 48.5% during the period which were higher than the 45.6% that it had reported in the corresponding period last year. The company’s operating profit jumped £772 million as compared to £95.4 million last year. The earnings were ahead of estimates.

The fashion retailer ended the period with total cash and cash equivalents of £995 million as compared to £765 million at the corresponding period last year. Expressing optimism over the results, Peter Cowgill, JD Sports executive chairman said: “The Group continues to demonstrate outstanding resilience in the face of numerous challenges arising from the continued prevalence of the COVID-19 pandemic in many countries, widespread strain on international logistics and other supply chain challenges, materially lower levels of footfall into stores in many countries after reopening and the ongoing administrative and cost consequences resulting from the loss of tariff free, frictionless trade with the European Union.”

Segment-wise performance

The company reported a tax before tax and exceptional items of £245 million in the US during the period which was significantly higher than the £73.4 million that it reported in 2020 and £35.7 in 2019. Meanwhile, the US earnings also include the £72.9 million contributions from Shoe Palace and DTLR businesses that JD Sports has recently acquired. It also attributed the strong performance to the fiscal stimulus provided by the US government.

Despite concerns over the long term impact of the rising fiscal deficit, the US government has continued with massive fiscal stimulus. While the steep rise in US national debt, which is currently at the highest level, is a risk, addressing the economic fallout of the pandemic has been the more pressing challenge for the administration.

In his prepared remarks, while Cowgill acknowledged the macro tailwinds, he said “The reason why we performed so well in this period is that we have world class fascias and management teams who understand the aspirations and expectations of their specific consumer base, who in turn trust us to curate a product proposition that delivers to their needs.”

Looking at JD Sport’s performance in the UK and Ireland, it posted a before-tax profit of £170.8 million. The corresponding figure for 2020 and 2019 is £52 million and £114.9 million.

JD Sports guidance

Commenting on the guidance, JD Sports said that “it is not appropriate to use an extrapolation of the first half results as the basis for guiding future performance.” The company also said that it is “cautious” of trading restrictions during the peak season before Christmas.

It said that it is “generally encouraged by our performance in the first few weeks of the second half although retail footfall remains comparatively weak in many countries.” After accounting for the macro challenges, it expects to post a before-tax profit of £750 million in the full fiscal year.

Footasylum merger

Earlier this month, the Competition and Markets Authority (CMA) blocked JD Sport’s acquisition of Footasylum. Kip Meek, chair of the CMA group conducting the enquiry had said in the report that “This deal would see Footasylum bought by its closest competitor and, as a result, shoppers could face higher prices, less choice and a worse shopping experience overall.”

Commenting on the CMA’s provisional report, the company said that it is “disappointed by this decision.” It also said that “In particular, the Group does not understand how the CMA can now acknowledge that JD has no incentive to deteriorate the price, quality, range and service offered at JD after the merger, but then still find that JD would find it commercially rational to worsen the Footasylum retail offer, given that both consumers and brand proprietors expect retailers of premium brands to maintain high standards in retail execution and consumer engagement.”

JD Sports shares were trading 7.7% higher at 10 AM London time today. The shares are up almost 39% so far in 2021 and are outperforming the FTSE 100 by a healthy margin.