This Retail Stock Thrives in Downturns. This Time Won’t Be Different.
The retail sector has been hit hard on fears of rising inflation, a pullback in consumer spending, and a possible recession.
The Dow Jones U.S. Retail Index is down 19% this year, and it’s a similar story in Europe. The Stoxx Europe Total Market Retail index is down 28.7%.
But JD Sports Fashion (ticker: JD.UK), has a record of thriving in downturns. The British sportswear retailer—which sells footwear and apparel from brands including Nike NKE +1.73% , New Balance, The North Face, and Under Armour UAA +1.83% —could buck the latest trend, with the stock estimated to more than double in price.
Shares have tumbled 25.6% to 1.34 pounds sterling ($1.61) in the past six months, but analysts at broker Investec INL +1.55% see a 123% rise to £3. Investment bank Peel Hunt PEEL 0.00% has a price target of £2.50.
JD Sports delivered solid positive underlying sales growth in 2009—during the global financial crisis, the toughest macro period in the company’s history—according to Graham Renwick, an analyst at broker Berenberg.
He said in a recent note that JD Sports became the best-performing stock in his coverage, with the shares rising about 180% in 2009, or 42% across 2008-09.
“There is a sense of déjà vu in the setup for 2022,” he wrote. “History shows that it is more resilient in downturns than investors currently believe.”
JD Sports earlier this month appointed a new CEO, French retail executive Regis Schultz, after longstanding executive chairman Peter Cowgill departed in May over corporate-governance issues. Fresh leadership and tighter regulatory controls should be seen as a positive.
Analysts largely think the retailer, which also owns the Duffer of St. George and McKenzie brands, is misunderstood. They say JD Sports shouldn’t be compared with rivals, because its key customers are between 16 and 24 years old—a group that is obsessed with the latest brands and isn’t encumbered with mortgages and other financial commitments. The company’s strong relationship with leading brands also means it can sell exclusive merchandise at full price.
“JD understands better than anyone what our core sports-fashion-focused and ‘street’ consumer wants,” interim CEO Kath Smith said in a statement. “Our laser focus allows us to curate and deliver the right product offering for this audience.”
JD Sports has a market value of £6.7 billion and employs more than 67,000 workers. It operates 3,360 stores in 34 countries. It trades at a multiple of 10.5 times this year’s expected earnings, a 10% discount to its peers.
The company posted pretax profit of £947.2 million for the 52 weeks ended Jan. 29, more than double the £421.3 million in 2021. Annual revenue was £8.6 billion, up from £6.1 billion in 2021.
The company is conservative with projections, forecasting flat 2023 earnings in line with the 2022 performance. Cost inflation can be offset by passing along price hikes to customers, say analysts Eleonora Dani and Clive Black at Shore Capital. The company “is tightly managed with excellent cash generation, tight stock and cost controls,” they wrote in a note.
JD Sports has a record of scooping up rival retailers—it took an 80% stake in Greek shops group Cosmos and bought U.S. footwear retailer Shoe Palace. Simon Irwin, an analyst at Credit Suisse wrote in a recent note that JD Sports “will continue to be seen as the consolidator of choice by the brands.”
He estimates that the company will have a significant war chest of £1.7 billion in a year, adding, “We believe that M&A will continue to be a significant route for growth and value creation.”