JD Sports Can Kick Away the Problem With Hot Sneakers

(Bloomberg Gadfly) -- JD Sports Fashion Plc returned to form on Tuesday, with its usual look of a profit upgrade. But investors would be wise to prepare for more difficult times ahead.

The sportswear retailer said full-year underlying pre-tax profit would be at the upper end of expectations of between 268 million pounds ($355 million) and 290 million pounds. The shares rose as much as 12 percent.

Still, the about 20 percent drop in the stock since June has cost it its premium to arch-rival Sports Direct International Plc. There, shares are up almost a third since it pointed to a nascent improvement when it released its full-year results in July. Investors are betting that maverick founder Mike Ashley can steer Sports Direct back onto the right track after two years of lurching from one crisis to another.

JD Sports Can Kick Away the Problem With Hot Sneakers

JD's discount to Sports Direct looks harsh. After all, it is still a solid performer: underlying pre-tax profit is still forecast to be more than double Sports Direct's in their current financial years, according to Bloomberg data.

The company had been outpacing rivals for the past few years, driven by the trend for workout gear to be worn outside the gym and sneakers becoming fashionable once more. 

JD Sports Can Kick Away the Problem With Hot Sneakers

But investors are right to inject a note of caution into JD's outlook.

To start, it's had some wobbles recently. It disappointed investors in June, by announcing that full-year profits would merely be in line with expectations. They had got used to JD consistently outrunning market forecasts and delivering a string of upgrades.

And same-store sales growth in the core U.K. business has slowed. Although this compares with a period when like for like sales expanded strongly, it underlines concern that the athleisure trend may finally be faltering. Consumers getting squeezed as inflation continues to outpace wage growth might also mean less money for flash new footwear.

JD blamed the slowdown in the first half on fewer new shoe styles being released compared to the year earlier. It expects more new models over next six months.

But warnings from U.S. sportswear retailers Foot Locker Inc. and Finish Line Inc. have raised fears that there may be more fundamental issues in the market than a lack of hot footwear: shoppers are falling out of love with trainers.

To compensate, JD is investing in international expansion, and developing its outdoor clothing business. It is also expanding its warehouse infrastructure. Consequently, capital expenditure will double this year to 160 million pounds.

JD Sports Can Kick Away the Problem With Hot Sneakers

JD can well afford it. It had net cash of 223 million pounds at the end of the first half.

The company isn't about to swap places with Sports Direct and become the laggard of the sports retail sector, as the current valuations suggest. It is still expanding sales and profit, and has plenty of financial firepower to withstand a tougher market. But with risks rising, JD will need its sneakers to be fast as well as fashionable to maintain the sort of growth rates that investors have come to expect.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.