JD Sports Fashion Plc

JD Sports Fashion Plc (LON: JD) is an FTSE 100 listed sports fashion retailer. It deals in multi-branded sports fashion and outdoor clothing along with footwear and equipment.

In January 2021, the Company will publish the trading statement.

Rationale for Valuation – Expensive at GBX 776.20

• In H1 FY21, the Company witnessed lower profitability margin.
• The Company’s Price/Earnings and Price/Cash Flow multiple are significantly higher as compared to the Speciality Retailers industry multiple, reflecting overstretched valuations.
• On leverage front, the debt-equity ratio stood at 1.65x in H1 FY21, which was higher as compared to the industry median, reflecting that the Company is highly leveraged as compared to the industry.
• From the technical standpoint, the 50-day simple moving average price is currently at around GBX 783.60, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• The Company’s business is exposed to risks such as compliance risk, fraud, criminal activity and bribery, which could result in reputational damage.
• It may experience an increase in operating expenses due to disruptions in the supply chain.
• The Group is also exposed to operational risk arising from a loss of customers with increased competition and poor operating performance due to climate change.

Recent News

On 13 November 2020, the Company has confirmed that the Competition Appeal Tribunal has quashed the CMA (Competition and Markets Authority's) decision. This decision is to prohibit the Group's acquisition of Footasylum Limited.

Financial Highlights (for the twenty-six weeks to 1 August 2020, as on 8 September 2020)

(Source: Company Website)

• In H1 FY21, the Company managed to retain sales through an unprecedented period, reflecting loyalty and affinity to the brand.
• The Company witnessed a decline in profitability which was due to additional costs incurred to shift to online business and temporary store closures, while the net cash increased for the period.
• It has experienced a decent demand for Finish Line in the US market.

Six Months Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has shown a decline in performance for H1 FY21 period. However, it has confidence in its strength and platform to achieve positive growth. Looking forward, the Company expects headline profit before tax to be approximately £265 million for FY21 on IFRS 16 basis. While the Company is facing the ongoing challenges of attracting footfall, an uncertain outlook for consumer confidence and potential for further operational restriction. Further, it is also making the investment in the warehouses, which will impact the liquidity position, and the Company might not be able to meet its working capital needs. Currently, the stock is trading near the 52-week high, suggesting that the upside potential might be limited, and the Company can face stiff resistance at the current level. The stock made a 52-week low and high of GBX 274.70 and GBX 890.00, respectively.

Based on the factors as highlighted above, we believe the stock of JD Sports Fashion is “Expensive” at the closing price of GBX 776.20 (as on 30 November 2020), with support from few catalysts needs to be evaluated at a later stage.

Dunelm Group Plc

Dunelm Group Plc (LON: DNLM) is a FTSE 250 listed homewares retailer based in the UK, which operates nearly 173 stores and trades through online as well.

On 14 January 2021, the Company will release the Q2 trading update.

Rationale for Valuation – Avoid at GBX 1,220.00

• On leverage front, the debt-equity ratio stood at 2.07x in 2020, which was higher as compared to the industry median, reflecting that the Company is highly leveraged as compared to the industry.
• In the short-term, the UK market is likely to remain under pressure due to increased market volatility.
• The stock has underperformed the index (FTSE 250) during the last three months and delivered a negative return of approximately 15% in the last three months.
• The Company’s Price/Earnings, EV/EBITDA, EV/Sales and Price/Cash Flow multiple are significantly higher as compared to the Speciality Retailers industry multiple, reflecting overstretched valuations.
• From the technical standpoint, the 50-day simple moving average price is currently at around GBX 1,364, which is higher than the current price and reflecting a downtrend in the near term.

Key Risks

• Failure to respond to changing consumer needs could affect the revenue of the Company.
• Inability to deliver proper products timely to the customers could hamper the reputation of the Company.
• Brexit could impact sales and margin of the Company due to a downturn in consumer demand.

Recent News

On 23 November 2020, the Company stated that it had granted a share incentive awards to Nick Wilkinson (Chief Executive) and Laura Carr (Chief Financial Officer).

On 5 November 2020, the Company is operating 145 stores in England (until 2 December 2020), and 9 stores in Wales were closed due to the 'firebreak' lockdown. Wales stores were expected to reopen on 9 November 2020, while the stores in Northern Ireland and Scotland remained open. Moreover, Online home delivery will continue to operate across the country, with an expected increase in demand during the lockdown period.

Q1 FY21 Trading Update (for the 13-week period ended 26 September 2020, as on 15 October 2020)

(Source: Company Website)

• During the quarter, the total sales increased by 36.7% year-on-year, with growth across the total retail system. It also continues to win market share in a buoyant homewares market.
• In the first two months of the financial year, the trading had been materially ahead of the initial expectations.
• Also, the Company witnessed a strong performance in the final month of the quarter, with an increase in online sales and a strong growth in stores.
• Led by strong demand and sourcing improvements, the gross margin surged by 100bps year-on-year.
• Since the year-end, the Company has opened two new stores in Sunderland and Clydebank, with an improvement in customer experience.
• On 26 September 2020, the net cash was £175.2 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has shown resilient performance in the homewares market. With the significant uncertainty relating to further Covid-19 restrictions and the implications for the economic outlook, the Company is unable to provide any meaningful guidance. While the new restrictions have also increased the level of uncertainty in the FY21 outlook. On 31 October 2020, the net cash was £156 million, with £175 million of bank financing facilities. Further, the Group is operating with a solid customer response since re-opening. Currently, the stock is trading near the 52-week high, suggesting that the upside potential might be limited, and the Company can face stiff resistance at the current level. The stock made a 52-week low and high of GBX 596.50 and GBX 1,601.48, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Dunelm Group Plc at the closing price of GBX 1,220.00 (as on 30 November 2020).

 

*All forecasted figures and Peers Information have been taken from Refinitiv, Thomson Reuters.

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