Difficult and disappointing trading takes the sheen off the sports retailer

by John Marshall

Following JJB’s first quarter trading update, which confirmed how difficult trading is, both Nick Coulter of Numis and Sanjay Vidyarthi of Dresdner Kleinwort, downgraded the shares, Coulter to ‘reduce’ from ‘hold’ and Vidyarthi to ‘hold’ from ‘buy’.

The first quarter is the least important of the group’s trading periods as it generates only 22% of group turnover. Underlying sales, which were down by 3% in the first seven weeks, were down by 5.3% in Q1. This implied a deterioration to a -8% run rate in the second half of the quarter.

The disappointment led both Vidyarthi and Coulter to alter their assumptions about trading for the rest of the year. Coulter, who was previously forecasting flat sales, now expects them to fall by some 2% as does Vidyarthi, who was originally slightly more cautious than Coulter.

Although sales were down, gross margins were well up despite the impact of the sale at the beginning of the period. The underlying improvement is currently 200 basis points but Coulter recognises that there is ‘the ever present risk of failing to sell-through either by virtue of poor product selection or ebbing consumer confidence.’ He is assuming gross margins will therefore rise by only 150 basis points especially as JJB is vulnerable to competitive pricing by rivals.

One of the reasons both downgraded the shares was the fact that they have recently been a strong market. Neither, however, would expect the shares to reach the 275p chief executive Chris Ronnie paid for his 29% stake less than a year ago. The shares are currently trading at 116p.