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June 22, 2022

Record FY profit glee at JD Sports marred by governance woes

JD Sports has booked record headline earnings for the year – up 125% to GBP947.2m (US$1.1bn) – but is warning the current global economic climate will dampen profit for FY23.

By Hannah Abdulla

JD Sports, which has experienced unusual turbulence during the year including the abrupt departure of its CEO Pete Cowgill and a hefty fine linked to its attempted acquisition of Footasylum, says it expects annual profit to be broadly flat as a result of “the general global macro-economic and geopolitical situation.”

Results summary for the year to 29 January

  • Revenue GBP8.56bn
  • Profit before tax GBP654.7bn
  • Profit before exceptional items GBP947.2bn

JD Sports said the result, which demonstrates the group’s “capacity for growth” in both new and existing markets, the strength of its global proposition and consumer engagement in store and online, was achieved in the face of a series of unprecedented challenges including sustained periods of temporary store closures in many markets, constraints in the supply of certain products due to factory closures within the global supply chains of the international brands, widespread turbulence in international logistics and the ongoing administrative and cost consequences resulting from the loss of tariff-free, frictionless trade with the European Union.

JD Sports says its search for a global CEO and non-executive chair is progressing well. It is however looking at a review of its regulatory compliance issues as well as its group’s corporate governance operating model and assessment of current compliance with the UK Corporate Governance Code, and that its board is “fully committed to making the necessary changes highlighted through these reviews.”

In February, JD Sports was fined GBP4.3m by the Competition and Markets Authority (CMA) for allegedly exchanging information with Footasylum, which it had agreed to buy at the time for GBP90m.

The CMA had blocked the deal several times but says following an interim order during its investigation of the deal, merger rules were breached. It claims Cowgill and Barry Bowen – the CEO of Footasylum – exchanged commercially sensitive information and failed to promptly alert the CMA.

Cowgill resigned with immediate effect last month which JD said was a consequence of an ongoing review of its internal governance and controls which led to a decision to accelerate the separation of its chair and CEO roles.

Strategic update

Helen Ashton, interim chair, at JD Sports says:  “This was another period of outstanding progress with the Group delivering a record headline profit before tax and exceptional items… We are particularly encouraged by the strong performance from the Group’s banners in North America. It is increasingly evident that the Group’s progress in North America, and the United States in particular, is having a long-term positive impact both on the Group’s overall performance and its relationships with the international brands.

“Balancing the operational requirements of running and growing a business through a global pandemic with the obligations of elevating governance standards has been complex and not without challenge. A number of regulatory issues have arisen through this time which, following a series of independent investigations alongside the completion of the Group’s Governance review, have highlighted the need for both greater relevant experience on the Board and more formalisation in governance systems, risk management recording, the documentation and appraisal of internal controls and the mechanisms for reporting relevant matters to the regulatory authorities where appropriate.

“The process to recruit a CEO is ongoing with a number of high calibre candidates at different stages of consideration including some who have only recently made their interest in the role known. The process to recruit a new Non-Executive Chair is also progressing at pace. Meanwhile, the Board is happy with how the interim arrangements are operating and will update the market on the progress of these search processes as appropriate.

“Whilst we are encouraged by the resilient nature of the consumer demand in the current year to date, we remain conscious of the headwinds that prevail at this time including the general global macro-economic and geopolitical situation. Against this backdrop, the JD Sports Board believes that the headline profit before tax and exceptional items for the year-end 28 January 2023 will be in line with the record performance for the year ended 29 January 2022.”

Analyst reaction

Commenting on today’s announcement, GlobalData apparel analyst, Darcey Jupp says: “With the shock exit of executive chairman Peter Cowgill in May 2022 alongside its numerous run-ins with the CMA in recent months, it is hard to focus on JD Sports Group’s gleaming –albeit very late– FY2021/22 results. Nevertheless, the group excelled, seeing revenue increase by GBP2.4bn to GBP8.6bn, now sitting comfortably up 40.1% versus FY2019/20, with its sports fashion fascia up 41.3% on two-year comparatives, as the global appetite for athleisure persisted after the pandemic boom.

“While rising inflation in its key markets will tarnish JD Sports’ FY2022/23 performance, the group will be somewhat protected by its sports fashion specialism, with its younger audience likely to continue purchasing branded sportswear to keep up with trends, though it should expect to see volumes decrease. This proves the importance of strong marketing and boosting its brand image, as JD Sports must ensure its shoppers do not trade down to more affordable competitors, such as Sports Direct and Dick’s Sporting Goods.

“JD Sports’ UK performance is particularly impressive despite the numerous headwinds it experienced in FY2021/22, including supply chain challenges and the c10-week closure of its physical stores at the beginning of the year, with revenue up GBP1.0bn to GBP3.6bn and 37.7% higher than pre-pandemic. The group benefited from an uplift in demand for its outdoor fascias including Blacks, Millets and Go Outdoors, as many UK consumers chose to go on staycations in summer 2021 amidst uncertainties surrounding the Covid-19 pandemic. While it is unlikely that JD Sports will experience the same demand this summer, it should be encouraged by the persisting interest in outdoor sports boosted by long-term health and wellness trends, with its outdoor living and cycling categories continuing to see strong demand into FY2022/23.

“The group’s US branch is going from strength to strength, finishing FY2021/22 up a staggering 62.0% versus pre-pandemic, as it benefitted from consumers receiving a third round of government stimulus payments in March 2021 and the successful acquisition of DTLR, bringing in revenue of GBP382.8m in the 46 weeks post-acquisition (completed on 17 March 2021), strengthening its portfolio of US sportswear retailers.

“Despite its strong performance, the global supply chain crisis restricted JD Sports’ US growth during the festive period, and the group is still experiencing supply issues with Nike and Jordan footwear in its US fascias in the first half of FY2022/23. While this will inevitably damage H1 sales, its previous outperformance suggests JD Sports has little to worry about, particularly as it remains a key wholesale partner for Nike despite it culling some partners from its fulfilment lists in its direct-to-consumer push.”

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