JD Sports Serves it Up

Record profit and smart strategy hit Sports Direct where it hurts

Hey Mike Ashley, this is how it's done.

That wasn't the strapline for JD Sports' game-winning interim results on Tuesday, but it should have been.

As Sports Direct -- founded by Ashley -- lurches from crisis to crisis, JD Sports reported a record 66 percent increase in pre-tax profit before one-off losses in the first half of its financial year, and says sales in the second half so far have been "encouraging."

JD Sports has been winning in all the areas that Sports Direct has been weak.

Its success is driven by its ranges of fashionable sportswear. The big sportswear brands, led by Nike and Adidas, are happy to have their hottest styles displayed in JD Sports because of their decent looking stores and sneaker-obsessed sales staff. This has allowed the company to make the most of sports clothing and footwear's return to fashion.

That's a contrast to Sports Direct's pile-it-high-and-sell-it-cheap approach. Its many tatty stores have put the big brands off supplying it with their hottest models, leaving the stores awash with the retailer's own brands, such as Dunlop and Karrimor.

Zooming Ahead

JD Sports's drive to attract top brands has buoyed its price to earnings ratio versus Sports Direct

Source: Bloomberg

Sports Direct has recognized these shortcomings. In fact, it said last week that it would spend 300 million pounds ($399 million) a year upgrading its stores. But that's probably too little too late to take on rival JD Sports.

The diverging trading performances are reflected in the two companies' share prices. JD Sports' premium to Sports Direct is deserved after Ashley's series of profit warnings and a Parliamentary inquiry into its labor practices.

JD Sports' shares are up by more than a third this year, including a 6 percent gain on Tuesday. Its market capitalization is now about 40 percent bigger than Sports Direct's, whose shares are down 45 percent despite efforts to improve conditions for employees and a share buy-back.

International Plans

JD Sports' recent push into Australia is its latest move to broaden revenue sources outside its home base

Source: Company Data

This isn't to say that it's all smooth sailing ahead for JD Sports. Its recent stellar run may have started to skew investor expectations for ever-faster growth, and it will have to manage that.  Although losses halved at its outdoor division, this will continue to be a modest drag on profit. 

JD Sports is using some of its 232 million pounds of net cash to extend its international footprint, which should help to continue the sales momentum. However, this is not without risks. Given the cash pile, there might also be pressure to increase the amount paid out to shareholders.

The majority of the products that JD Sports buys are sourced in dollars from the big sports brands, so the pound's 11 percent drop since the Brexit vote means it could face higher costs. Its emphasis on exclusive models, where prices are often higher, should help it to pass these on to customers. That's not so easy for Sports Direct, whose discounting model leaves it less scope to squeeze margins. 

JD Sports's valuation is as pricey as a pair of the latest Nike trainers, while Sports Direct is in the bargain basement. Ashley's retailer has a long climb back to a top spot on the shop floor. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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