JD Sports may be a household name but shares in the fashion retailer have suffered so much that it is now the second cheapest stock in the FTSE 100 on a forward price to earnings basis, ahead of only the specialist insurer Beazley. No doubt value investors are eyeing up the shares, which now trade below 100p. So is it worth a punt?
The company has had a torrid start to the year. In January it cut its guided range for annual profit to between £915 million and £935 million, down from a previous forecast of £955 million to £1.03 billion. It also reported a 1.5 per cent drop in like-for-like sales during November and December, which it blamed on high levels of promotional activity from rivals. It was enough to trigger downgrades from analysts at the brokers Citi and UBS.
It was the second profit warning in as many months for the Manchester-based retailer, as the sportswear sector has broadly struggled with slowing sales and had to resort to heavy discounting. Indeed some of the biggest brands in the industry have suffered over the past year, with the likes of Nike and Under Armour losing 33 per cent and 13 per cent off their share price, as the pandemic boom in activewear and athleisure has started to wane.
Nike’s decline has hit JD hard. The American brand is its biggest partner, with its sales accounting for about half of the group total. Nike has struggled against its competitors in recent years, losing market share to Adidas and the younger running brand Hoka.
JD’s overreliance on Nike has hurt its ability to grow. Gross margins are still strong at around 48 per cent but slower sales growth, in a period of investment into the business over its store space, IT, distribution and integration from M&A projects, means that the shares have been stuck in a cycle of downgrades for more than a year.
There is still hope that JD can break free from this cycle, though it will depend on its return to growth with a more innovative range of products and improvements in its ecommerce and loyalty programmes, as well as healthier consumer confidence among its British shoppers.
There has been a mixed picture on the high street this year, though the British Retail Consortium reported on Monday that retail spending in January was 2.6 per cent higher than a year earlier, well above the average growth of 0.8 per cent over the past 12 months. It helped JD shares gain 2 per cent alone that day.
That is not to mention the group’s race to crack America, though there is no shortage of cautionary tales of UK retailers that have failed to do so in the past. Two years ago the company said it planned to increase its rate of expansion across the United States and Europe, which some analysts at the time believed could lead it to double its pre-tax profit to £2 billion.
It is true that its acquisition of the US retailer Hibbett last year has helped boost its estate in America, though estimates compiled by FactSet suggest that the market does not expect it will surpass £1 billion in pre-tax profit until its 2028 financial year.
Even with the recent bump in the share price, JD still trades at a forecast price to earnings multiple of just 7, the second lowest in all of the FTSE 100, though it does offer a free cash flow yield of more than 7 per cent. Such a low p/e multiple does signal the shares are in value territory, especially against its five-year average ratio of 15.4. Shareholders may be encouraged by the fact that Régis Schultz, the JD boss, has used the recent share price weakness as a buying opportunity, buying around £99,000 worth in mid-January.
There will be many who are also tempted to pick the shares out of the bargain bin, but for now its growth story looks too risky.
Advice Hold
Why Market leader but low valuation reflects risk around growth
Fevertree Drinks
Fevertree Drinks was once a favourite among retail investors but performance has been painful over the past five years, with the tonic water maker losing roughly half of its market value. But a new partnership with Molson Coors could change its fortunes.
The American group behind Blue Moon, Carling and Doom Bar beers agreed last month to take an 8.5 per cent stake in Fevertree for £71 million, with the latter returning the proceeds to its investors via a share buyback. Molson Coors now has an exclusive licence agreement that allows it to sell, distribute and produce the tonic maker’s products in the US.
For Molson Coors, it represents a wider strategic push into premium and non-alcoholic drinks. For Fevertree, it is a way to expand in the US on an even stronger footing. Last year America generated more revenue than the UK for the tonic maker.
The deal may include a period of higher spending as Fevertree increases its marketing contribution. Analysts at Deutsche Bank have warned that while the deal looks good for Fevertree’s growth in the US, it is likely to weigh on its near-term financials, and have downgraded their estimate for compound annual growth rate in adjusted earnings per share from more than 40 per cent, from 2024 to its 2028 financial year, to 17.5 per cent.
Still, this rate of growth is nothing to sniff at and in the long term, reducing the cost of doing business in what is now its largest market should help support capital returns.
There is some speculation that Molson Coors could eventually buy all of Fevertree and with the latter’s shares trading at just 716p, compared with their peak of more than £37 in 2018, this looks feasible. It would certainly not be without recent precedent, as last year the Danish brewer Carlsberg bought the London-listed drinks maker Britvic for £3.3 billion. But at an enterprise value to adjusted cash profit ratio of 21.2, even with the decline in the share price, Fevertree can hardly be described as an obvious value opportunity.
Advice Hold
Why Molson Coors deal supportive of growth but valuation is full
