This quality FTSE 250 growth stock is defying the high street gloom
When markets get fearful, even the share prices of the best companies suffer. Within this group, I’d include self-styled ‘King of Trainers’ retailer JD Sports Fashion(LSE: JD).
2018 was certainly a rollercoaster year for investors. Beginning the year at 341p, JD’s stock pushed through the 500p mark over the summer before falling back 33% by the end of the year.
Price movement aside, today’s trading update covering the all-important Christmas period is, in my view, yet more evidence why the FTSE 250 constituent is one of the best picks in the sector.
The company reported “further significant progress” with its overseas expansion — growing sales by 15% in the 48 weeks of the financial year to date. Total like-for-like sales growth has now hit more than 5%, the company says, “including a consistently positive like-for-like performance across Black Friday and the Christmas period.” While a bit more detail would have been nice, this is still very encouraging stuff, in light of news that trading over the festive period was the worst for 10 years, according to the British Retail Consortium.
In contrast to some companies who have been required to slap heavy discounts on their wares amid the reduction in consumer confidence, JD’s gross profit margins have also been similar to those of last year.
The outlook was also positive. Despite some labour cost inefficiencies as a result of automating and expanding its primary warehouse, JD stated that it was “confident” that pre-tax profit for the full year would come in at the “upper end of published market expectations” of between £325m and £352m. The business also remarked it had been so encouraged by initial sales at its five US stores — following the capture of retailer Finish Line last June — that it has decided to convert up to 15 of the latter’s stores in the first half of 2019.
On 14 times earnings before this morning, JD Sports wasn’t the cheapest retailer out there. But a solid track record of increasing sales and profits, overseas growth potential, and a savvy management team make this one retailer I would feel confident buying for the long term.
Less tempting
I’d certainly continue to favour JD over retail peer Sports Direct International(LSE: SPD).
December’s interim results, summarised here by my Foolish colleague Harvey Jones, were a mixed bag with a huge drop in underlying pre-tax profit (as a result of the House of Fraser acquisition), soothed by a rise in group revenues and gross margins. That said, the gloom within the sector still caused many investors to continue jumping ship.
Having fallen almost 40% since last July, you might expect Sport Direct’s shares to be trading on a rather tempting valuation. In my opinion, this simply isn’t the case.
On 16 times earnings for the current financial year (ending 29 April), the stock looks pricey considering that operating margins and returns on capital are lower than at JD Sports. The latter also carries more debt and pays nothing out to shareholders in the form of dividends. All this before high street ‘saviour’ Mike Ashley’s questionable spending spree (Debenhams, Evans Cycles and the aforementioned House of Fraser) is even considered.
While it would be quite reasonable to argue that no retailer is safe in the current climate, JD continues to get my vote over its rival.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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