JD’s sports stores raise sales by 8.4%, but the outlook is dim

JD Sports Fashion is “extremely cautious” about the British retail environment after the country's value-added tax (VAT) was increased to 20.0 percent from 17.5 percent on Jan. 4, 2011. The VAT rise is taking place at a critical time when product costs, especially for imported goods, have become materially higher, so the company is anticipating an overall decline in consumer spending.

A survey by the British Retail Consortium (BRC) showed that retail sales fell by 1.9 percent year-on-year in March, the worst drop in 16 years. On a comparable basis, the decline reached 3.5 percent, as consumers are showing increasing concern about government spending cuts, inflation, limited wage raises, job cuts and the prospect of higher interest rates. High inflation and low wage growth produced the first fall in disposable income in 30 years, BRC added.

In the eight weeks to March 26, the opening period of JD's fiscal year ending in January 2012, the company's comparable net sales declined by 1.2 percent from a year earlier, hit by a 1.4 percent decline at its sports shops while the performance of its fashion chains remained unchanged. JD attributed the decline in net sales, and the resulting contraction in margins, to the change in VAT. During the eight-week period, comparable gross sales, including e-commerce, were up by 0.4 percent.

The gloomy outlook pushed down JD's share price by nearly 2 percent to around 885 pence in afternoon trading on the London stock exchange and a brokerage firm, Investec, cut its target price to 950 pence from 1,010 pence but still rated the stock a “buy.” The consensus among financial analysts is that the group will improve its results in the current financial year, boosting revenues to about £900 million (€1,013.0m-$1,465.8m), the gross margin to nearly 50 percent and net profits to £82 million (€92.3m-$133.6m).

In the fiscal year ended on Jan. 29, the group's revenues rose by 15 percent to £883.7 million (€994.7m-$1,439.3m), supported by a 3.1 percent increase in same-store sales, the addition of 15 stores and acquisitions. The gross margin rose to 49.5 percent from 49.3 percent, and the operating profit after exceptional items was up by 19 percent to £79.9 million (€89.9m-$130.1m). After taking into account onetime costs, the operating profit was up by 21 percent to £75.6 million (€85.1m-$123.1m) and net profits surged by 31 percent to £55.9 million (€62.9m-$91.0m).

The group's sports retail business boosted gross revenues by 8 percent to £667.2 million (€751.0m-$1,086.7m), with comparable store sales up by 3.8 percent against a 2.3 percent increase a year earlier. The division widened its gross margin to 51.0 percent from 50.6 percent and the operating profit, before exceptional items, was up by 14 percent at £73.3 million (€82.5m-$119.4m). Chausport, the French retailer bought in May 2009, contributed £36.4 million (€41.0m-$59.3m) in revenues and £0.5 million (€0.6m-$0.8m) in operating profits. Same-store sales at Chausport were up by a stunning 12.5 percent.

The group increased the number of its JD and Size? sports stores to 427 from 420 in the course of the year, following 28 openings and 21 closures. Their floor space was expanded to 1.215 million square feet from 1.178 million square feet. The two banners increased their combined network in the U.K. and Ireland to 351 stores from 345 and to 1.131 million square feet from 1.100 million.

The group opened its first three JD stores in France. Two were new openings and one was the conversion of a Chausport store in Lille. JD also opened its first store in a railroad station at Liverpool Street in London. If the experience is positive it could be replicated in other major stations. The store closures included six small Chausport stores with a combined floor space of 6,000 square feet. The network of the French retailer shrank to 73 stores from 75, but their floor space rose to 79,000 square feet from 78,000 because the five new store openings added 10,000 square feet.

The group's fashion retail business, comprising the Bank and Scotts banners, lifted gross revenues by 17 percent to £134.1 million (€150.9m-$218.4m) supported by an increase in the overall number of stores to 111 from 103. Comparable store sales of the two fashion chains were down by 0.7 percent. The operating profit of the activity increased to £6.4 million (€7.2m-$10.4m) from £3.3 million.

JD's rapidly growing but low-margin wholesale business generated gross sales of £85.5 million (€96.2m-$139.3m) and posted an operating profit of £0.2 million (€0.2m-$0.3m) compared with a £0.1 million loss a year earlier. At the end of the year, the division comprised the rugby brands Canterbury and Kooga as well as a distributor and multi-channel retailer, Topgrade Sportswear.

JD bought Canterbury in 2009 after it went into administration. On Jan. 28, 2011, the group sold 25 percent of Canterbury International (Australia) to local managers for A$1.1 million (€0.8m-$1.2m). Last year, Canterbury booked sales of £48.3 million (€54.4m-$78.7m) against £15.4 million a year earlier thanks to a strong performance in Australia and New Zealand. JD is rebuilding a global presence for the Canterbury brand. It expects recent license agreements reached in South Africa and Argentina and the creation of a U.K.-based unit that is developing a more fashion-oriented product range to support future sales growth The brand is also expected to be benefit from this year's Rugby World Cup in New Zealand, where it will provide the kits to four teams taking part in the tournament.

Topgrade bolstered sales to £26.6 million (€30.0m-$43.3m) from £19.7 million but doubled the operating loss to £0.8 million due to the cost of developing the getthelabel.com e-commerce platform. The group estimates it will take two years for the online business to become sufficiently big to generate a profit. In a vote of confidence in the company, on June 21, 2010, JD increased its stake in Topgrade to 80 percent from 51 percent for £1.2 million

Kooga, wholly owned by JD since July 2009, increased sales to £6.5 million (€7.3m-$10.6m) from £5.0 million, but the unit booked an operating loss of £0.3 million compared with a £0.2 million profit a year earlier.

In the past year, JD had capital expenditures of £33.0 million (€37.1m-$53.7m), £10.1 million more than the previous year. The bulk, £25.6 million (€28.8m-$41.7m), was spent on its sports operations, including £3.9 million (€4.4m-$6.3m) to equip a new leased warehouse in Rochdale, England. Fit-out costs will amount to some £20 million (€22.5m-$32.6m) and the facility is scheduled to become operational early in 2012.

JD increased its net cash position to £86.1 million (€96.9m-$140.2m) at the end of January from £60.5 million a year earlier. On April 12, it set up a new bank facility totaling £75 million (€84.4m-$122.2m) and expiring in October 2015. The funds will enable the company to continue to finance its development in the U.K. and abroad, initially in Europe, through organic growth and acquisitions.

In the past months JD pursued its acquisition spree. On Feb. 7, it acquired 80 percent of Kukri Sports for a symbolic £1. The company specializes in supplying customized team sportswear for schools, universities and sports clubs worldwide. In the fiscal year ended April 30, 2010, Kukri booked sales of £12.9 million (€14.5m-$21.0m) and an operating loss of £0.3 million.

On Feb. 16, it increased its stake in Focus Brands to 80 percent from 51 percent for £1.0 million. The price tag could be increased by £250,000 depending on performance. The company is involved in the design, sourcing and distribution of footwear and apparel for its own brand and license brands.

On April 4, JD took over 100 percent of Champion Sports, the big Irish retailer of sportswear and footwear, for a symbolic amount of seven euros, plus a €17.1 million advance to settle the company's debt. Champion has 22 stores in the Republic of Ireland and one store in Northern Ireland. In the fiscal year ended on Dec. 31, 2009, Champion posted a turnover of €54.0 million and a loss before tax of €4.9 million .