Jd Sports Plc Case Analysis

Client specification

This report is for individual or institutional investors who want to diversify their portfolio by investing in sportswear retail industry. Given the positive announcement of its high profit, it is suggested that JD sports Fashion Plc is undervalued and a final justification will be made in this report. The report will provide in-depth analysis of JD sports Plc. that includes the following content:

• Analysis of sports clothing industry, including its main features, key market drivers and competition within industry.
• Analysis of JD Sports Fashion Plc, including detailed business description, corporate strategy and SWOT analysis.
• Equity valuation using DCF and comparable methods. The valuation is based on

five-year financial status of JD and industry, market and company overview are taken into account.

A final share price range will be given based on valuation outcomes.
This report was produced under a fair and unbiased view by Imperial College Business student, however it should not be taken as a mean of persuasion for investment in JD Sports Fashion Plc.

Executive Summary

• According to valuation analysis, our target price range is GBP 797p to 862p. The most updated prices falls in this range, so we have a HOLD rating for this equity.

• Compare to its peers, JD has the following highlights:

• Valuation

• Risk factors:

Table 1 Sales revenue and EBITDA forecast for next 5 years

Industry overview

Sports Industry Overview

• The global sportswear revenue was £169 billions, which contributes 15.3% of the overall global apparel market.

• Due to public interest in health and fitness, the sportswear retail value has already gone up by 7% since 2009, which is its strongest performance in seven years.

• The global sportswear market is relatively fragmented. As leading players in the industry, Nike and Adidas accounted for 18% of the sporting clothing market in 2013.

• North American is the largest market region by sales revenue, which contributes 34.6% of global sportswear industry. But emerging markets has shown a strong growth of 12.2%. According to CAGR, sportswear market in Latin America, which contributes 17% of the sales revenue, is estimated to increase by 16.6% from 2013 to 2017

• Sportswear industry is competitive in general despite of strong brand loyalty within the industry. Customers have access to more products information online than ever so that they are able to easily switch between brands. In addition, sports industry has an indirect competition with weight-loss food industries, which, for some people, is a great substitute for exercise.

• Large industry players attempt to expand their markets internationally through acquisition, particularly within the emerging markets. They concentrate on improving their profitability, cost efficiency and product quality by better management strategies.

• Brand recognition is obvious within sportswear industry. Therefore, fashion-conscious customers are willing to pay more for popular brands. But for emerging markets, customers react more sensitively to prices (Euromonitor, 2013).

• Small innovative firms are usually acquired by large companies as small players can only find limited financial source.

Industry driver

• Increasing levels of health awareness is the key to sustainable growth in sportswear industry. Customers are more willing to invest their money in functional and professional sportswear.

• Number of females actively involved in sports significantly increased in the past five years because exercise is generally recognised as an appropriate way to keep fit and healthy. With the fact that women have more disposable wages, they spend more on fashion and comfortable sportswear.

• Innovation of reliable and affordable sportswear brings growth to the sector. Customers pay more attention to the functions of sportswear such as light cushioning, dri-fit. They are willing to spend money to either improve their sports performance or avoid potential injuries.

• Professional, comfortable but fashionable sportswear becomes a trend, particularly for female customers. Therefore, sportswear manufacturers focus on producing athletic clothing with stylish outlooks, which stimulate their sales as they can charge higher prices.

• Omni-channel experience provides convenient platform for shopping, review and customer’s services. This platform enables retailers to tailor their products to customers’ needs and hence stimulating their sales.

Competition

• JD Sports has three main competitors within the UK, they are Halfords Group Plc, Sports Direct International Plc and WH Smith Plc.

• Followed by the boom in sportswear market, many non-specialist firms joined the sports clothing market, which makes this industry much more competitive

• To maintain a strong position in the sports retail market, fashion awareness become much more important. This makes specialist sports retailers less competitive compared to the non-specialist ones.

• Sports brand limited their supply only to specialist companies in order to protect their proposition.

Company Overview

JD Sports Fashion
“Leading brands, exclusive styles, only at JD”

• Founded in 1981, JD Sports Fashion is known as the leading specialists multiple retailers of branded sportswear, fashion wear and outdoor equipment. It is a subsidiary of Pentland Group, who owns 57.5% of its share.

• JD Sports Fashion has four business areas, ie. Sport retail, fashion retail, outdoor retail and distributions businesses.

• JD Sports Fashion operates mainly in the UK and Ireland. But it has business in France, Spain, Australia, New Zealand, the US, Canada and Hong Kong. It is headquartered in Bury, the UK and it has 10,508 employees in total.

• JD has more than 800 retail stores, and it keeps increasing its presence in the European market with additional stores in France, Spain, The Netherlands and Germany.

• In 2015, JD Sports Fashion Plc reported sales of £1.52 billion, a 14.4% increase from 2014. The profit before tax and exceptional items in the continuing businesses has gone up from £82.0 million to a record of £100 million.

• After the announcement of higher- than-expected profit on 31st July 2015, the share price went from 727.5p to

851.0p.

Product portfolio

Size?

Founded in 2000, Size? Supply footwear, apparel and accessories with various brands. It mainly operates in the UK and Republic of Ireland. But recently it opened its fascias in France, the Netherlands and Italy.

Scotts

Scotts retails fashion and sport targets older, more affluent male consumers. It offers brands such as EA7, Lacoste, Fred Perry, Adidas Originals and Original Penguin.
Tessuti

Tessuti offers premium branded fashion menswear in the UK. The physical stores offer customers a strong mix of brands including Hugo Boss, Ralph Lauren Polo, Diesel and Stone Island.
Chausport

Chausport operates throughout France retailing leading international footwear brands such as Nike, Adidas and Le Coq Sportif together with brands more specific to the local market such as Redskins.

Champion

Champion, which was acquired by the group in April 2011, is one of the leading retailer of sports apparel and footwear in Republic of Ireland was acquired in April 2011 with 20 stores in premium location in town centres and shopping centres.

Sprinter

Sprinter offers both international sports brands and their own brands for footwear, apparel, accessories and equipment together with children’s wear. It is one of the leading sports retailers in Spain.

Footpatrol

Footpatrol is the most exclusive sneaker retailer in London. It provides the sneaker fraternity with the most desirable footwear, apparel and accessories as well as providing a hub for the sneaker community to come and chat about what they love most. Footpatrol is situated in the central soho area on Berwick Street. The store supplies new and classic sneakers, limited editions, Japanese exclusives and rare deadstock.
Nicholas Deakins
Nicholas Deakins designs and supplies men’s footwear and clothing to JD sports and outside business. Since its inception in 1991, the brand has been split into several collections with labels including Nicholas Deakins Green Label clothing and footwear, Deakins and Deakins kids.
Kooga

Kooga designs, source and wholesales rugby apparel and equipment, with teamwear, replica and leisurewear ranges. Kooga is also sole kit supplier to a number of professional rugby clubs.
Kukri

Kukri sources and supplies quality sports teamwear to schools, universities and sports clubs. Customers can design their sports equipment on its website. Kukri is also provides sole kits professional sports teams.

Corporate strategy

• Graphical expansion: With main business operations in Europe, JD Sports Fashion is seeking opportunities outside the Europe for greater growth by acquisitions or opening new retail stores. Building business potential outside the Europe may require different business model, but it strengthen supply relationship, which is strategic in such competitive industry.

• Retail property investment: JD Sports Fashion believes that professional product presentations increase customers’ desire for products, hence the sales. The group regularly refurnishes the retail stores and even makes use of advanced technology.

• Omnichannel trading development: JD aims to become a cutting edge international multichannel retailer (annual report 2015). The group relocated digital market team to the Sharp Project in Manchester, famous for digital product creations. Official websites in local languages and currencies have been used in Europe and online sales are expected to contribute more in the future.

Business Model
• Segments: JD Sports mainly operates in the following three segments: Sport retail, Fashion retail and Outdoor retail.

• Geography: The operation is classified into three divisions, ie. UK, Europe and rest of the world. In 2014, 81.6% of the total revenue is from the UK followed by Europe with 17.3%.

• Stores: JD Sports is running 563 retail store under 10 retail brands.

• Black Outdoor Retail Limited and Tiso Group Limited contributes majority of the outdoor retail revenue.

SWOT Analysis

Strength

• In the last few years, the revenue growth of JD was sustainable. As stated in annual report, the revenue has reached a record high of £1,522 million in 2014. Constant growth is crucial for the group to keep a strong market position.

• JD has constantly invested in Omnichannel selling. The group has a focus on products presentation, building regional website and advertising through social media. This strategy greatly increases its exposure to customers, which is very important in a market with huge brand recognition.

• JD has reduced its total energy used by 2.2% in 2014 with 2.9% in electricity usage and 2.7% in CO2 emissions.

Weakness
• As stated in annual report, 82% of the JD’s revenue is from the UK, which means the group has a huge market concentration. This gives undiversified risk because the sales revenue will be greatly affected if any financial or regulatory events happen in the UK.

• JD Sports Fashion has relatively low return on equity of 15.5%, which is below what its main competitors have. This may imply that JD sports has not made good use of shareholders’ money and hence generated low returns.
Opportunities
• JD Sports Fashion has taken strategic steps in expansion through acquisition. Expanding markets internationally not only increases its brand popularity and sales revenue, it also establishes a solid foundation for competitions in emerging markets.

• JD Sports benefits from booming retail market in the UK as the retail sale is estimated to grow consistently driven by positive economic expectation. According to Canadean’s report, UK is expected to reach £330 billion by 2016 at CAGR of 3.10% during 2011 to 2016.

• The losses generated by outdoor retail in JD Sports went down in the past few years.

• JD Sports has a clear focus on existing market and they opened 63 new stores in total, including a 9k sq ft Trafford Centre flagship store and 24k sq ft flagship on Oxford Street. This action consolidates their market presence in Europe and hence drives their sales growth.

•
Threats
• UK labor cost increase is a potential threat to JD Sports as it has huge market dependency on UK. In 2014, UK government increased the minimum wage from £6.2 to £6.5 per hour, which may increase the group’s total cost in the future.

• JD Sports are facing challenges from expansion of its main competitors such as Sports Direct and JJB Sports. These sportswear retail companies are fully aware of importance of brand exposure and consistent supply chain, they may restrict JD’s development outside the Europe, particularly in the emerging market.

• Counterfeit products are attractive to customers because of its low price and similar look. Fake items may significantly affect JD’s revenue. And JD’s brand image will be spoiled by low quality of fake products.

• JD sports may lose supply from their main third-party brands, especially in the markets outside the Europe.

• British Pounds are getting stronger recently, which may increase the potential cost such as cost of wages and materials.

Company Valuation
Financial Situation

• The overall profit before tax has reached a record high of 100 million in 2015FY.
• Strong performance in sales across Europe with 13% growth.
• On 31st July 2015, JD Sports Fashion announced that full-year profit would be 10% ahead of market forecasts due to better-than-expected sales growth
• Equity price has gone up from 725p to 851p in less than 2 weeks
• Outdoor sector still remain weak, despite of decrease in loss
• Dividend reached 7.05p per share, which is a 4.1% jump from that of last year

Discounted Cash Flow Valuation (DCF)

DCF analysis projects the future cash flow and then discounted them to get the present value. The DCF analysis is based on the following three scenarios: Base Case, Upside Case, and Downside Case. Details are given in the following content:
Base Case
The sales growth is estimated to remain around 20% in the next 3 years due to the impact of relative strength in sportswear market. From 2019, the growth will decrease because of increasing size of the company and limitation of expansion. The COGS growth is assumed to be steady at 17.7% to 20% in the next five years.

Upside Case

The process of international expansion is smooth and buying power in the UK market is strong. Sales will remain high above 20% in the next 3 years. COGS level is growing at a decreasing rate, and COGS growth will finally exceed the sales growth in 2019.

Downside Case

Buying power in the UK market weakens, competition becomes much more severe and international expansion faces challenges. As a result, sales growth rapidly goes down from 20% to 10% in the next 5 years.

For each case, variables such as sales growth, COGS growth, SG&A (% sales) and Capital Expenditure (% sales) are estimated for the next five years. Five-year projection period is chosen because JD Sports Fashion is a solid company with strong market advantages.

For detailed estimation figures for each case, please see tables in Appendix.

The final equity price is based on two discounting methods. The first approach uses exit multiple (EV/EBITDA multiple in my valuation method). A number 8.9x is chosen as it is the median of industry EV/EBITDA multiple. This figure is higher than JD’s exit multiple indicated by Bloomberg. The second one is based on perpetuity growth rate.

A final valuation of share price is the weighted average of prices in three scenarios. The weight assigned to base, upside and downside cases are 60%, 25% and 15% respectively. Through this method, we have final outcome of GBP8.51 for JD Sports Fashion Plc.

Comparable Method
As indicated by its name, comparable method compares JD Sports Fashion Plc with its peer companies and derives JD’s value based on statistics of its competitors.
The following tables give a overview of how JD performs compared to its peers.
There are two ways to evaluate the equity price in comparable method, either by EV/EBITDA multiple or by P/E ratio. Forecasted EBITDA and EPS value are required through DCF for each case. Again, final outcome is the weighted average of each scenario assigned with the same weights (to make the result more consistent).

Valuation Summary

The following tables are constructed based on DCF and comparable method:

Hence the share price range of JD Sports Fashion Plc should be from £7.97 to £8.62.