Some of the biggest winners in the FTSE 100 recently have been shareholders of sports and leisure retailer JD Sports (LSE: JD). Shares in the company are up more than 15% this month, and it’s easy to see why – last week, JD reported excellent numbers for the first half of 2019.
Despite all the doom and gloom surrounding the retail sector these days, JD was able to record same-store sales growth of 10%, with physical retail representing more than 80% of total sales. The stock is currently trading at 715p per share. This is just one part of an impressive historical return for shareholders: as my colleague Royston Wild recently wrote, £1,000 invested in 2009 would have returned over £42,000.
These results make JD one of the few UK retailers that have been able to expand their physical presence on the high street. In even better news for shareholders, JD’s management announced that it was increasing its dividend payout by 3.7%. However, the overall yield is just 0.24%, so the stock is perhaps of limited interest to income investors.
Diversification is key
The athleisure retailer is also putting in serious work to reach new markets. In the first six months of the year, JD added 23 new stores in Europe, seven in the Asia Pacific region and six in the US. UK sales now account for 41% of revenue, down from 52% year on year.
Total revenue was up 47%, partly due to the acquisition of Finish Line, a US-based sports clothing company. The acquisition provided £725m in additional revenue to JD. With all the uncertainty surrounding Brexit, such diversification should be cheered.
Valuation
With all that being said, JD does seem like a high-risk proposition. It is quite expensive. It has a price-to-earnings ratio of 26.4 and, as mentioned, a negligible dividend yield. And although it has done comparatively better than most other retailers, that does not mean that it cannot get badly hit in a downturn. This is clearly a growth play. So what are the growth possibilities?
Management has said that it intends to open as many new European stores (23) in the second half of this year as it did in the first, as well as 15 more in the Asia Pacific region. In the US, the company is busy converting former Finish Line stores into JD locations. So there is clearly scope for revenue growth.
One important thing to note, I think, is that even though turnover has grown at a healthy clip year on year (£1.85bn in the first half of 2018 to £2.72bn in the first half of 2019), the same cannot be said of pre-tax profits. These increased from £122m in the first half of 2018 to £130m in the first half of 2019.
In other words, a 47% increase in turnover amounted to just a 6.5% increase in pre-tax profit. Personally, I would like to see JD improve on that metric before I bought this growth story, particularly since the earnings multiple is so high.
