The Motley Fool

Is JD Sports Fashion plc a buy after beating forecasts by 15%?

Shares in sports clothing retailer JD (LSE: JD) have risen by over 8% today following a strong Christmas trading period. The company now expects that headline profit before tax and exceptional items for the current year will exceed expectations by around 15%. Clearly, this is positive news but could the difficulties facing the UK economy cause the business to struggle in the remainder of 2017?

Rapid growth

JD reported like-for-like (LFL) store sales growth of 10% for the half year to 30 July. Since then, it has been able to maintain that rate of growth, even though last year’s comparable period was very strong. This shows that its strategy is working well and that consumer demand in the UK and across Europe remains buoyant. This should allow it to beat expectations for the current year, with profit set to be as much as £230m versus a forecast of £200m.

Although the company has stated that it may be unable to record a fifth consecutive year of double-digit sales growth in the next financial year, its outlook remains positive. It’s due to post a rise in earnings of 14% in the 2018 financial year, followed by growth of 11% the year after. This puts it on a price-to-earnings growth (PEG) ratio of 1.5, which indicates that it offers good value for money.

Certainly, it’s a brighter near-term future than that offered by sector peer Sports Direct (LSE: SPD). Its earnings are due to fall by 55% this year before rising by 5% in the following year. Furthermore, JD lacks the degree of political risk its rival is set to endure. Concerns surrounding working conditions at Sports Direct have become mainstream news and have undoubtedly hurt sales. While JD has been the subject of similar concerns, it responded to negative news well and it hasn’t hurt its financial performance to the same degree.

A difficult outlook

Both stocks face an uncertain outlook. The UK economy may be buoyant at the present time, but inflation is set to increase in the current year. This could cause demand for non-essential items to fall, since consumers may prioritise necessities while wage growth fails to keep pace with inflation. Therefore, investors may wish to seek out retailers which offer wide margins of safety, in case their performance is hurt by difficult trading conditions.

Both JD and Sports Direct have appealing valuations, with the latter’s expected return to growth in 2019 putting it on a PEG ratio of 1.2. Therefore, they appear to offer sufficiently low valuations to merit purchase at the present time. Of course, JD’s lack of political risk means that it’s fully deserving of the current premium valuation over its peer. It could beat its rival in 2017, although it could prove to be a volatile year for both companies, as well as the wider UK retail sector.

Therefore, is this stock a better option?

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.