Athletics-wear retailer JD Sports Fashion (JD.) has been a favourite of City analysts for five years or more, but investment bank Morgan Stanley rejects this optimism.

In an initiation of coverage note published today (16 October) Morgan Stanley analysts laid out its twin concerns of acquisition indigestion and too much riding on products from sportswear giants Nike and Adidas.

After running its own numbers the investment bank believes these potential threats could undermine what has been a spectacular investment for years. Morgan Stanley calculates the stock's value at 355p, 10% below current levels of 394p, and that's after the stock's near 6% (24.6p) decline on Tuesday.

A STOCK MARKET STAR

The sports and leisurewear retailer has been wowing investors for more than five years thanks to soaring sales and profits. During that time JD revenues have rocketed 137% from £1.33bn to £3.16bn last year to 28 February 2018.

Pre-tax profits have jumped more than three-fold to £294.5m.

This rampant growth has drawn investors to the shares like moths to a flame, sending the stock soaring. Since late 2013 the share price has increased almost 10-fold to recent highs to 521p, before the stock market sell-off hit.

IS THE COMPANY OVER-STRETCHING ITSELF?

Through a combination of acquisitions and rolling out more stores JD Sports has managed to outpace its rivals in terms of sales and profit growth.

But Morgan Stanley is concerned about the company’s latest acquisition, The Finish Line, and its over-reliance on the two giants of sportswear, Nike and Adidas.

Analysts warn that The Finish Line acquisition, completed earlier this year, may be a ‘step too far’ and it questions the quality of the branch locations.

It also flags that following the deal around half of JD Sports’ future revenues will come from sales of Nike products, roughly 20% from Adidas.

That, says Morgan Stanley, leaves the company over-exposed to changes in the wholesale strategy of either player, especially in regard to new products.

COULD SALES RUN OUT OF ROAD?

The global athletic footwear market alone is worth an estimated $100bn a year and JD’s sales have been growing at a compound run rate in excess of 20% a year.

Thanks partly to The Finish Line deal and other acquisitions, first half sales this year were up an even punchier 35% even with a weak UK retail backdrop.

In the past sales of must-have trainers like Adidas’s retro Stan Smiths and Nike’s VaporMax have been key to the company’s growth success. But both Nike and Adidas are now restricting access for wholesalers in order to increase their own profit margins.

That means that the earnings expectations the company set at the time of the deal may not be met, leaving the shares looking expensive, according to Morgan Stanley.

JD Sports has also announced the departure of chief financial officer Brian Small, who will stand down from the board at the end of October. He will be replaced by group Neil Greenhalgh, who has been with the firm for the last 14 years and has been most recently the group finance director.


Issue Date: 16 Oct 2018