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JD Sports Fashion PLC - Fundamental Investment Case

Research

Publication Date: 25 Feb 2019 - By Robert Prather By Robert Prather
Actionable
Differentiated

Equity Fundamental Equity UK Consumer

Vision Research released a report on (LON:JD) JD Sports Fashion Plc on 9/21/18 and removed on 12/18/18 after the stock fell (28%).  Vision Research is updating and releasing the report since the stock is almost back to the original price and remains a compelling long term opportunity.  

Qualitative Concerns:

  • Since Vision exited the position in late 2018, optimism has returned to JD Sports despite long term headwinds. 
  • Top 5 customers, consisting of roughly 80% of sales (particularly Nike  and Adidas), continue to invest heavily in direct to consumer channels over the wholesale channel. 
  • The recent World Cup and a number of small acquisitions could have temporarily boosted topline revenue growth. 
  • JD Sports continues to add new stores, leases and fixed costs despite sales moving online.
  • Finish Line acquisition was a risky move to increase store count considering the difficult turnaround and the capital paid and capital to be invested.

Fundamental Concerns:

  • Revenue growth on a like for like basis continues to decelerate despite some World Cup benefit. 
  • Channel shift from brick and mortar to ecommerce continues to put pressure on EBIT margins. 
  • The negative impact to gross margins appears to be masked by currency benefits. 
  • Growing inventory (with and without acquisitions) points to further margin impairment. 
  • Balance sheet now less conservative after JD Sports swung to net debt post Finish Line acquisition. 
  • Valuation appears stretched based on historical averages and brick and mortar retail.

Bottom Line: A brick and mortar high street retailer facing competition from their own suppliers

JD Sports Fashion PLC

Source: VR Fundamental

Pages: 46

Released: 25 Feb 2019

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The Author

Robert Prather

Equity Analyst

Industrials, Consumer, Telecom & Media, Technology

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