JD Sports Fashion: Medium Term Upside

JD Sports Fashion (JD.L) has carved a solid niche in UK retailing and its recent international expansion makes good strategic sense. But the key to credibility, and the share rating, is its ability to pull Blacks into the black in FY14. It has already flagged a £10m hit to interim profits (due in September), but we see scope for further disappointment on numbers given the challenging economic backdrop. In the medium term the rating looks undemanding if management can work its ‘small box branded retailer’ magic on Blacks, but it may take some time.

Taking the successful JD formula overseas
The resilience of the JD retail formula was illustrated by positive like-for-like sales in the 19 weeks to 9 June (Sports Fascias +1.2%). With the UK market now mature (c 335 JD stores) management has taken a sensible approach to international expansion, acquiring local businesses in France, Ireland and Spain. The rollout of JD stores in France appears to be going well, but we believe Spain will be tougher.

Blacks: A tired brand, but with turnaround potential
Acquired on 9 January 2012 (in a £20m pre-pack deal), JD warned in June that Blacks would lose £10m in FY13 (plus £5m restructuring), mainly in H1. As well as delays in re-stocking, it takes time to exit leases, close unprofitable stores (100 of 290 closed to date) and integrate the operation. A new MD (reportedly joining in November from Cotswold) will have his work cut out, but has significant scope to revitalise the business.

Valuation: Medium-term upside
We expect H1 normalised PBT to be little more than breakeven (H1 FY12: £16.0m) due to the Blacks losses, margin pressures and increased central costs, with results (and cash flows) heavily skewed to H2. With significant economic pressures we believe there is some downside risk to consensus estimates. Much of this is already reflected in a modest rating (FY13e EV/EBITDA 3.4x versus Sports Direct at 7.7x), suggesting medium-term upside once confidence strengthens.

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