JD Sports proves its credentials

JD Sports stuck to the form book today as the tracksuit-to-trainers chain again demonstrated why the winter season offers such rich pickings for investors.

With the retailer upgrading guidance for full-year profits on the back of another strong Christmas performance, shares bounced 6% to 386p to justify JD's inclusion in the interactive investor Aggressive Winter Portfolio.

JD shares have been up by an average of 29% over the previous 10 winters, with positive returns across eight of those years. Its performance is only bettered in our list by equipment rental firm Ashtead, with the rest of the top five made up of Travis Perkins, former Regus business IWG and Taylor Wimpey.

All the signs in the City are that JD will enjoy another strong winter, particularly after festive trading showed impressive like-for-like sales growth of 3% across all fascias and territories. Profits for the year to February 3 will now be around £300 million, compared with market expectations of £270 million-£295 million.

The stock is up 9% since the end of October, but Cantor Fitzgerald's retail analyst Mark Photiades thinks that a price of 500p can be reached in the long term. Investec Securities is not far behind, with 475p forecast prior today.

It's worth remembering that shares peaked at 451p in May, only to fall back after JD's summer trading update failed to deliver the usual upgrade to forecasts. Sentiment was also impacted by a profits warning from Foot Locker and the potential threat to JD from Amazon's deal to sell Nike branded products.

These factors now seem less of a threat, with executive chairman Peter Cowgill pointing to the group's "highly differentiated" offer across various channels.

There seems no end in sight for the athleisure trend of fashion-driven sportswear, while JD has opportunities for growth through international expansion and the now profitable Blacks-to-Millets outdoor business.

This optimism is backed by Photiades, who said JD had confirmed its market leadership and operational effectiveness with another strong update.

He said the recent performance was all the more impressive when considering the trading conditions and the very tough comparatives from last year.

Photiades added: "All of the core business units saw positive performances with the online, international and outdoor units seeing the fastest growth. We understand that gross margins were as expected."

JD trades on a projected price/earnings (PE) ratio of 15.2, which Photiades thinks does not fully capture the earnings momentum or the global growth potential of the business.

International expansion has included the first JD stores in Australia, with a group-wide total of 40 new sports fascias added in the half-year to July and a similar number planned for the current six month period.

This, combined with a strengthened digital and multi-channel presence, should drive further revenue and operating profit margin growth.

JD's strong record of cash generation means the group is well placed to fund these opportunities, with the company believing it is in the longer-term interests of shareholders if it keeps dividend growth restrained.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment.