The Motley Fool

Why JD Sports Fashion PLC Is A Better Bet Than Rivals Supergroup PLC And ASOS plc

JD Sports Fashion (LSE: JD) issued an upbeat trading update today, ahead of the company’s AGM.

The company reported that it has made a strong start during the first 19 weeks of the year. However, a weak euro is weighing on JD’s European stores, and international margins are expected to suffer as a result.

What’s more, the group notes that it is trading against challenging comparatives for the remainder of the year. 

Still, the JD’s management remains confident that after a strong start to the year, current earnings expectations for the financial period ended 31 January 2016 should be met. 

According to current City forecasts, JD’s earnings per share are set to expand 10% this year. Sales are forecast to grow by 6.1%. Based on these estimated rates of growth, JD will earn 42.6p per share for the year ended 31 January 2016. 

City analysts are predicting similar growth for 2017. EPS growth of 11% is pencilled in for next year, which implies that 2017 EPS are set to expand to 47.3p. 

Based on these figures, JD is trading at a forward P/E of 15.8 and 2016 P/E of 14.5.  

Strong run

Today’s update is just the latest in a long run of positive updates from the retailer. Indeed, over the past six years JD has nearly doubled sales and EPS has galloped forward at a rate of around 10% per annum.

JD’s dividend payout has increased at a similar rate and the company currently yields 1.1%.

On almost all metrics, JD has outperformed its key competitors, ASOS (LSE: ASC) and Supergroup (LSE: SGP) during the past five years. 

For example, while ASOS has been able to drive impressive sales and earnings growth since 2009, this growth has been erratic and has come at the expense of profit margins.

Best of breed

Since 2009, ASOS’s operating profit margin has been cut in half. Furthermore, while EPS have expanded at around 19% per annum over the past six years, EPS fell 67% during 2012, 16% during 2013 and are forecast to fall 5% this year.

For a company that’s trading at a forward P/E of 88, ASOS’s growth is erratic, and the high valuation dose does not leave much room for error. Similarly, Supergroup’s lofty valuation seems to be over-exaggerating the company’s prospects. 

Supergroup currently trades at a forward P/E of 19.9. According to current forecasts, the company’s EPS are only set to expand by 2% this year. The company doesn’t offer a dividend yield. 

Numbers don’t lie

I think JD is the best pick of this trio of retailers. And the best way to highlight the company’s success is to analyse how an investment of £10,000 in each company would have fared over the past five years. 

From June 2009 to present JD has turned £10,000 into £60,000, including dividend reinvestment. 

£10,000 worth of ASOS stock would have turned into £75,000 today — not bad but at one point it was worth twice as much. Meanwhile, Supergroup has returned 100% over the period. 

Overall, it may seem like ASOS has achieved the best return for investors but most of this performance is tied to the company’s premium valuation. If ASOS’s valuation were to go back to more normal levels, JD would lead the pack by a mile.

Hidden gems 

Here at The Motley Fool we're always on the lookout for the market's hidden gems, and we recently stumbled across a company that files under the radar of most investors.

The company in question is led by a renegade CEO, and the group has the potential to increase profits by 300% to 500% over the next few years.

We believe that this could be one of the market's last undiscovered gems.

So, our team of top analysts has put together this FREE report on the opportunity. 

This is something you do not want to miss, and we're offering you the chance to find out more for free right now -- just click here

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.