Introduction to the company
JD Sports Fashion plc (JD) is a sports-fashion retail company, founded in 1981, with headquarters in Bury, England. The company retails clothing, footwear, and accessories. JD segments its business operations into ‘Sports Fashion' and ‘Outdoor'. JD has 1230 stores across 14 countries and employs approximately 25,800 staff (MarketLine, 2017).
The company holds a market share of 21.2%, with its major competitor, Sports Direct, holding 27% (Market Research Reports | IBISWorld UK, 2018). JD reported revenues of £198.1 million during FY2017, a 28% increase from the previous year (MarketLine, 2017). The increase in performance of the Blacks and Millets outdoor clothing and equipment chain, purchased in 2012, can explain this increase. JD's acquisition of ‘Go Outdoors' in late November 2016 can also partly contribute to this growth (MarketLine, 2017).
This report analyses the financial stability of the company, using ratios and market research in order to determine if JD is worth investing in. We have used Sports Direct as a direct comparison due to the organisation being JD's major competitor.
The major products and services in the Sporting and Outdoor Equipment UK industry are outlined in Figure 1 below.
Figure 1: (Market Research Reports | IBISWorld UK, 2018)
Sportswear and performance footwear have both grown in value by 8% and 11% respectively in 2017, due to ‘athleisure' becoming a part of consumer lifestyle (Euromonitor International, 2018). The is defined as “casual, comfortable clothing designed to be suitable both for exercise and everyday wear” (athleisure | Definition of athleisure in English by Oxford Dictionaries, 2018). Consumers are also now looking to exercise among nature to escape the stresses of daily life e.g. hiking. This trend can explain the success of JD's brands Blacks and Millets.
The British population are also more aware of the health benefits of exercise and have been encouraged to adopt a more active lifestyle through initiatives such as the ‘Step Right Up!' campaign in 2017. Millennials are also increasingly influenced by social media personnel, purchasing sportswear that they see on their channels. International events such as the Olympics and the FIFA World cup provide opportunities for companies to sell more sportswear due to the spikes in sporting activity that come after these events (Market Research Reports | IBISWorld UK, 2018).
A threat to the success of the industry is the rise in department stores, supermarkets and online retailers stocking similar sportswear and equipment to businesses like JD. They can offer products for a lower price due to strong purchasing power and ability to utilise economies of scale. The ‘athleisure' trend has also led to high-street brands like Primark and H&M to develop their own fashionable sportswear ranges at low prices. E-commerce sites such as Amazon aggressively compete with firms due to their ability to offer similar products at competitive prices with fast delivery. (Market Research Reports | IBISWorld UK, 2018).
The most effective indication of a company's performance is its profitability (Dess and Robinson, 2018). JD has seen substantial increases in its profits between 2015 and 2017. Gross profits rose by 57.3%, from £739,550 to £1,163,640. This rise in profit is a result of JD experiencing a considerable increase in sales - with revenue rising 56.26% between 2015 and 2017, due to a recent trend in Sportswear fashion causing an increase in demand. Fashion trends, while beneficial, are very temperamental, which could affect JDs future sales. (JD Sports profits propelled by fashion for sportswear, 2018). However, net profits have risen drastically at a rate of 242% over the three years from £53,971 to £184,580. This is significantly better than Sports Direct who saw a decrease in gross profit of - 2.8% along with a decrease in net profits of 1.38% between 2015 and 2017. JD's gross profit margin increased by 1.3% between 2015 and 2017, however the operating and net profit margins saw better growth. With JD's operating profit margin rising from 6.09% to 10.08% between 2015 and 2017 and net profit margin increasing from 3.56% to 7.78%. This has been caused by a rise in sales as discussed earlier combined with JDs costs rising much less proportionately, with X and X. (specifically what cost has been reduced?)
JD's ROCE rose from 26.10% in 2015 to 37.24% in 2017 indicating an effective utilisation of their capital over the period. This increase in ROCE can be linked to the rise in revenue combined with a less than proportionate rise in JD's costs, along with an increase in JD's ability to pay off its debts, which a 5% rise in Debt payment over the 3 years indicates. Their ROCE was consistently higher than double the interest rates (McClure, 2018) which reiterates an effective use of JDs capital. Sports Direct saw their ROCE fall by 13% over the three years, showing a large mismanagement of their capital.
There has been a rise of 14.5% in JD's ROE from 2015 to 2017, illustrating that the investors are getting a consistently increasing return on their money year on year. This is due to the increase in profits achieved by JD which were able to counteract the negative ROA, overall producing a positive ROE. Sports Direct's ROE saw a fall of 2.07% between 2015 and 2017. The ROA for JD has been the most disappointing performance indicator. JD's ROA fell from 4.29% to 3.61% between the years 2015 and 2017. This indicates that JD is not managing its investments in its assets efficiently or effectively. However, in 2016 JD acquired Go Outdoors, an acquisition results in a large one-off payment for an incredibly large asset which can artificially lower the ROA in the short term. (Profitability Indicator Ratios: Return on Assets, 2018).
The position of a company refers to their liquidity and their levels of gearing. Liquidity concerns a company's ability to meet their short-term debts; while gearing measures the extent to which debt funds the capital structure of a company (Davies and Crawford, 2012). It is important to note that the standards of liquidity vary from industry-to-industry and is dependent on the length of the cash-flow cycle. For example, a company like JD, where finance options are not available, will have a higher liquidity ratio than companies which offer more expensive products, such as DFS – which use finance options to incentivise purchases. From an investor's point of view, it is an important distinction to be made, as a company on paper, although profitable, may not necessarily be liquid (Wilcox, 1971).
Since showing signs of appreciation in recent years, JD's current ratio fell almost 40% in 2017 to 1.33. Despite the recent fall, JD's current ratio still sits above rival's, Sports Direct, which had a current ratio of 1.07 in 2017. Furthermore, there has been increase in the gearing ratio of JD, with 29.9% of their capital structure comprising of debt capital. However, this figure is again over-shadowed by Sports Direct's 41.1%. When placed in context with JD's aggressive growth strategy, including recent acquisitions of wider fashion stores, such as ‘Blacks' and ‘Millets' (Wallop, 2018) these statistics are nothing for investors to fear. In order to fund such a large-scale strategy, it is possible that JD invested some of their assets and took on more liabilities – consequently reducing liquidity and increasing their gearing ratio.
Cash from Operations (CFO) is an integral part of the cash generation ratios and is defined as ‘the main revenue-producing activities of the company that are not investing or financing activities' (Davies and Crawford, 2011). Such ratios have been used to analyse JD Sport's cash generating ability, these are included in the appendix (Figure 1).
JD's cash return on assets increased by 71% from 2015 to 2016, then decreased the following year from 0.29 to 0.23 (Figure 1). This could potentially indicate that their assets have become more efficient one year, then less efficient the next. However, it is more likely to be due to the increase in CFO from 2015 to 2016 as a result of JD opening 35 new stores in the UK and 41 in Europe. The decrease however, is as a result of their assets increasing disproportionately to the payment of goodwill for Go Outdoors. They paid £112,305,00 when their net assets were only £67,871,000, making the goodwill £44,434,000. Sport Direct's CFO did the opposite, from 2015 to 2016 it dropped dramatically by £171,252,000 (Figure 2). This therefore caused their cash return on assets figure to be 0.03 compared to JD's 0.29 that same year. JD's cash return on assets was higher than Sport Direct's in all three years looked at.
JD's cash to income ratio increased from 1.13 in 2015 to 1.69 in 2016, this increase of 0.56 is as a result of their cash from operating activities increasing by £110,252 and their operating income increasing by £31,233 in 2016 (Figure 1). Their increasing CFO could be as a result of improved receivable days from 12.9 to 11.3 from 2015 to 2016 (Figure 1). Collecting receivables quicker would increase their CFO because it is a source of cash (Investopedia, 2018.). From 2016 to 2017 JD's saw a decrease in their cash to income ratio by 0.53, this is due to their operating income increasing substantially and bringing the value a lot closer to 1(Figure 1). This means their ability to generate income from operations is high. Sports Direct's cash to income, increased year on year from 0.8 to 1.21, even though their income decreased every year (Figure 2). When this is compared to JD's cash to income, Sport Direct's was noticeably lower in 2015 and 2016, however, in 2017, they managed to overtake JD. Even though Sport Direct's figures increased year on year, they were still a lot smaller in 2015 and 2016, which indicates that Sports Direct ‘takes in more cash and cash equivalents than what it earns in profits' compared to what JD takes in (Li, 2017.)
Other Factors: Global Expansion
In quarter 4 of 2017 JD has taken steps to increase its presence in Spain and Portugal by purchasing Sport Zone, which operates in those countries (Frost, 2018). This deal has recently been completed, and JD has stated that the resulting company will be the second largest sports goods retailer in the region with a turnover exceeding £392.2 million and a total of 311 stores. (Woodall, 2018). Continuing the trend of global expansion, the company recently unveiled a deal valued at £393.6 million to acquire Finish Line Inc., a U.S. retailer specialised in selling sports accessories (Kilgore, 2018).
The official number of stores operated by Finish Line in 2017 was 573 across 44 states and Puerto Rico (2017 Finish Line Inc. Annual Report, 2018). In addition to this deal, JD's first store in Korea is scheduled to open on April 13, 2018, starting their spread into another foreign market. It has also been mentioned that the current plan for Korea is to open 31 additional stores across the country by the end of 2018. Local marketing in Korea will be managed by Hot-T, a Korean shoemaking company (Da-young and Ha-yeon, 2018). These recent acquisitions show a strong agenda for global expansion. JD's own 2017 annual report divides revenue between ‘UK', ‘Europe', and ‘Rest of world'. The percentage of revenue per section is, respectively, 69.6%, 27.6%, and 2.8%, with the U.S. not yet included in the report.
No individual country accounts for more than 10% of JD's revenue excluding the UK (Annual Report & Accounts 2017 JD Sports Fashion plc, 2018). Peter Cowgill, JD's executive chairman called the U.S. the largest ‘athleisure' market in the word (Mintel, 2018). This shows that although JD operates globally, there is still much room for expansion. Such moves, however, carry a large risk. Should JD fail to adapt to these new markets, its acquisitions may generate large losses, negatively impacting investors. In Korea, for example, the market may prove difficult to adapt to due to cultural differences despite the local marketing involved. On the other hand, both Finish Line and Sport Zone are large companies with an established local presence. This, added to experience within the acquired companies lowers chance of failure which should give investors increased confidence in JD Sports.
With the British population becoming increasingly aware of the benefits of a healthy lifestyle, and the subsequent rise of the ‘athleisure' trend, JD have gone from strength-to-strength in their pursuit to captivate the ever-growing market. These attempts have been rewarded with consistent increases across all profitability ratios – most notably increases of over 50% in both gross profit and revenue between the years 2015 and 2017. What is most promising, however, is despite JD's £400 million global expansion (Wallop, 2018), a healthy liquidity and current ratio is maintained – proving JD to be a stable investment for both the short and the long-term. While JD's rival, Sports Direct, pose a threat to JD through price-undercutting, JD's stock variety, including high-end ‘athleisure' fashion, ultimately places them in a better financial position (Mintel, 2018). It can be concluded from the consistency of JD's financial statements and ratios that investing in JD is a sound investment decision. JD's future is very promising as it utilises its global presence to gain market share within the wider-fashion market. (Wallop, 2018).
...(download the rest of the essay above)