JD Sports Fashion Plc (JD) Earnings Call Transcript & Summary

Welcome to today's JD Sports Fashion Full Year Results Analyst Presentation. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Helen Ashton to begin. Helen, please go ahead.

Thanks very much, Jordan, and thank you, everyone, for joining the webinar today for the JD Sports plc full year financial results for the year to the 29th of January 2022. We did hope to be with you in person. However, with the train challenges, we've chosen to move to a webinar. My name is Helen Ashton, and I'm the Interim Chair of JD. I joined the Board in November of last year as the -- as an NED and the Chair of Audit and Risk. I'm joined here today by Kath Smith, our interim CEO, and Neil Greenhalgh Finance Director; Wayne Davies Co-CEO of our North American business; and Mike Armstrong, who leads our brand relationships. In terms of the running order for today, I will provide a brief update on governance and recruitment before handing over to Neil, who will walk you through the numbers. Kath will then talk a little bit more about what makes JD so special. And Wayne will speak in more detail about North America, whilst Mike will share a little more color around our brand partnership strategy. I'll then share a few closing remarks and outlook. And then, of course, we'll be happy to answer any questions that you have. But before we begin, I'd love to share a brand video, which I hope gives you a little bit more insight into the JD business of today. [Presentation]

Thanks very much, Jordan. So firstly, I'd like to reflect on the strong operating and financial performance for the year for the 29th of January 22. There are a number of factors that have driven this record performance, and it's a huge credit to our former Chair, Peter Cowgill and an extremely talented team at JD that we've delivered this record profit performance. We're in a super strong position and have cash on our balance sheet to support our ongoing development opportunities. As you know, we've been undertaking a review of regulatory compliance issues, the group's corporate governance operating model and an assessment of current compliance with the U.K. Corporate Governance Code. These reviews have now been completed, and the Board is fully committed to making the necessary changes highlighted through these reviews. On the 2 executive searches, the process to recruit a CEO is ongoing with a number of high-caliber candidates at different stages of consideration, including some who have only recently made their interest in the role known since we announced the succession process. This is a really important process for us to find the right candidate with the necessary skills to lead the business over the next stage of its development. And we will take the necessary time to make sure we have the best person possible for the role. Likewise, the search for the non-exec chair is also progressing at pace and we've been really pleased with the caliber of the candidates for this role, and we look forward to updating on both searches at the appropriate time. Finally, I would really like to draw attention to the important progress that we've made on our ESG initiatives during the year, and we include detail on and the role of our ESG committee within our results statement. We are absolutely committed to making a positive social and environmental contribution and we'll keep you updated on our progress. Finally, I can also confirm that we've repaid in full the support our U.K. businesses received during the financial year from the Coronavirus job retention scheme, which totaled GBP 24.4 million. Now I'd like to hand over to Neil, who will take us through the financials.

Thanks, Helen. We've already signposted many of the messages that come through the numbers. So I'm not going to dwell too long on numbers that are relatively historic. Could I ask my first slide, please. The first slide is a summary of the results. Revenue in the year increased by nearly 40%, with profit increasing by more than 100%. There is the usual segmental breakdown later, but just on a headline perspective, the sports fashion profit is obviously the [indiscernible] performer and that it's the biggest part of our business and is now making more than GBP 900 million profit, but also outdoor return to profitability in the year, which is really pleasing after a couple of difficult years. Next slide, please. In terms of the 5-year summary, this slide illustrates very clearly the progress that we continue to make in the U.K. and Ireland in particular. This may be our most mature market but we still see significant opportunities. It also illustrates the significant progress that we've made in North America since we first entered that market in 2018. Next slide, please. As ever, the sports fashion summery is one of the key slides that we show. And so I'll just spend some time taking you through this. We split it into our operating segments, which are premium sports fashion, which is JD and then in North America, it includes DTLR, Shoe Palace and Livestock and then we have our other fascias. So in the U.K., that's the fashion fascias such as Tessuti, but it also includes our sporting goods fascias such as Sprinter and Sports Zone in Europe. The North America other fascias is the Macy's concessions. We've added some additional detail on to this slide just to show you what the profit of each operating segment is without the JDIP recharge, just to explain what that is. That's a charge that's driven for the tax requirements that get levied on those international businesses, which trades under the JD name. We have to make a notional charge for that. As we continue to grow internationally, then that charge is increasing in scale. And so I thought it was helpful just to split that out because then the profit pre the JDIP recharge is then effectively constant -- it's consistent really between the different operating segments. So the key messages I call out from this slide are, if you exclude the impact of the IP recharge, then the operating margin in our premium U.K. and Ireland businesses is back above 16%, which you'll recall is the historic kind of expectation for this business. It's where our business has historically landed. Also, the North America business, again, the premium North America business, again, excluding the IP charge, that operating margin is now approximately 14%. I want to remind you that when we first acquired Finish Line in 2018, that business was making a margin of 3%. So we have seen substantial growth in that market. In terms of Asia Pacific, then the operating margin there now is more than 10%. That's largely driven by the performance of our business in Australia, which continues to progress positively. And elsewhere, it was really largely a year of recovery after the worst of COVID in the previous year. Can we move on to next slide, please. Again, the North America slide is one that we include in our last presentations, and I know it's another key slide that people are interested in. It has been a very positive year in the U.S., in particular, with strong growth, particularly in the first half when all of our businesses benefited from the fiscal stimulus. And it's pleasing to see that the operating margin just in the Finish Line JD business is well over 10% now with a GP percent that's overall, that's close to 50%. Wayne Davies, who is our joint CEO in North America. He'll expand on the developments that we've seen in that geography later on in the presentation. Go on next slide, please? In terms of outdoor, then obviously, we're very pleased to see that business return to profitability after 2 difficult years. There is still work to do, though, particularly on gross margins, but we have a very good foundation now from which to develop. We move on, please. There isn't too much to say about the balance sheet. I should mention the significant increase in goodwill and fascia names. That's a reflection of the significant amount of M&A activity that we've done in the year, and I've got a slide show, which breaks that increase on value. I'd also just in passing just mentioned 2 new lines this year, the assets held for sale and liabilities held for sale. These are technical accounting descriptions that we had to include this year. They relate to [indiscernible] Island, which, as you know, we are currently in the process of divesting, that process is continuing in line with the CMA directions. Next slide, please. In terms of the cash flow, then as you'd expect, after a year of record profitability, then that's reflected in the very strong cash generation with the strong free cash flow helping to fund the significant M&A activity in the year. You'll also see we did the equity raise at the start of the year in February '21. And the proceeds of GBP 455 million are also reflected in the cash in the year. Go to next slide, please. I've got this slide in historically, and I thought it relevant to keep it in again today just to show the material acquisitions in the year, and it just helps you to reconcile the balance sheet and cash flow movements, particularly for our various models. As I said, on the balance sheet side, there has been a significant increase in the level of the intangible assets in the balance sheet. This slide gives you the breakdown of that, but it's clear that the DTLR, the business that we acquired in the East Coast of the U.S. in spring 2021, that's been a big driver of that. Can we move on to next slide, please. Stocks may have gone up overall in the year, but that's largely been driven by the impact of the acquisitions that we've done. And on a like-for-like basis, which is really reflected through the cash flow line, then this illustrates that we've maintained our usual type merchandising control of stock levels. The lines that probably stand out within here as much as any is the -- is North America where the supply chain challenges, which have been well publicized. They did impact on the flow of stock into the business through the end of the last financial year and through the first quarter of this year in particular. Those supply challenges, particularly in footwear are well known and as we've said before, North America is more impacted by that just by nature of both its products and its fund mix. The stock levels in the U.S. are normalizing though now as we indicated that it will. Next slide, please. Moving on to CapEx then after a slowdown of activity in the year to January 2021. Last year was back to normal really in terms of the CapEx program, particularly with regards to the investments that we're making in our retail estate. There was a particular focus last year, as you can see in North America, which reflects the expansion of JD both by converting existing Finish Line stores and opening new stores. There are 87 JDs at the end of January, which has increased to 96% by the end of May. We actually see the spend on CapEx accelerating this year with significant investments in all geographic areas. You'll also see significant spend on the warehouse projects with the Derby warehouse scheduled to commence some limited fulfillment later this year with full operational use from mid-2023. The warehouse that we're developing in Heerlen in the Netherlands, that's about 12 months behind that in terms of timetable. So it will be 2024 before that site is operational. And then go to the next slide, please. And then let me just very briefly take you to show you the effective tax. The big driver of the difference between the basic cash rate and the actual effective tax rate is the nondeductible nature of the exceptional charge that we have in the movement of both options. That will reverse in the future as and when those options get exercised. I'll now hand you over to Kath Smith, who is our Interim CEO and she'll take some time to just reiterate the key principles which make JD a success.

Thank you, Neil. And good morning, everyone. I'm Kath Smith. And as Neil said, I've stepped in as interim CEO, having previously held a position of Senior Independent Director on the Board. My background is in building global brands with some 25 years in the sporting goods and outdoor sectors including time with The North Face, a part of the VF Corporation and with Adidas and Reebok. Next slide, please. As Helen touched on in her introduction, JD is a very strong business, and that is underlined by the record results that we are announcing today, more than double the previous record set in the year to January 2020. The North America, the U.K. and Republic of Ireland delivering incredibly strong performances. It is very clear that Peter and the wider team have built a strong business with sustainable growth characteristics underpinned by a globally recognized brand. So let me explain in a bit more detail what makes JD a success. As a business, we believe we have an unparalleled understanding of our consumers. And as a result, we are the leading business in the area of sports, fashion, lifestyle and outdoors. In order to maintain this understanding with the consumer, we've forged strong cultural connections with the universal cultures of sports, music and fashion. We have a detailed understanding of our fashion-focused consumer and cultivate our product offer to appeal to this audience. We have a talented and resilient team at JD, who are regarded as leading figures in their areas of expertise. We have a unity of purpose and have developed unique and enduring brand relationships. JD's multichannel strategy identifies and prioritizes stores as central to the JD offer. And we continue to evolve and develop our omnichannel approach to ensure that we present a seamless shopping experience to all our consumer touch points. These are our core strengths, and provide us with an excellent platform on which to build for the future. Next slide, please. This slide gives you an insight into the 5 pillars of our business. How we think about our audiences and how we segment our assortments to meet consumers' requirements. It's not just about understanding the nuances and takes for the consumer, but ensuring that what they want is easily available and accessible to them in the right pillar, in the right channel and down to the right fascia and the right door to properly enhance our engagement with them. As we expand our view globally, it's clear that our consumers in different parts of the world do not always want the same things. So we need to differentiate and curate our offering market by market to ensure that what we're supplying at a local level is the right product and at the right time. And we achieved this by our scale and experience, the right tone of voice, the right messaging, the best products and maximizing the potential for an incredibly strong retail estate, all of which is core to our DNA. And always ensuring that we are authentically local and never a tourist, we ensure that we are always relevant to our target audience and meet and exceed their needs. Next slide, please. JD is a global business with a brand covering 32 markets through a number of different fascia. Now I'm going to hand you over to Wayne Davies, our Co-CEO of JD North America, our second largest market to explain all about the U.S. Wayne?

Thank you, Kath. Next slide, please. Let me first talk you through what JD stands for North America. We're a portfolio of brand strategically assembled to serve and inspire unique consumer groups on their terms and in their metaverse. First -- so JD North America has rapidly become a core part of the group's business and present some incredible growth opportunity. I'd now like to play you a short video that shows you what we've been up to in the last year. So video, please. [Presentation]

Next slide, please. Before I talk to the FY '22 highlights, I just want to remind you that we now trade from over 930 stand-alone stores across the U.S. and Canada, and this footprint is further strengthening our relationship with our core global partners. The transition of Finish Line to JD is gaining momentum with 87 stores trading at the end of the reporting period and 96 as we stand today. 25 of the new JD doors in the United States opened since the beginning of FY '22. And there's a further 65 new and converted stores to be added this financial year. In our flagship storing, Time Square has played an important role in building our brand in the U.S. consumer and igniting interest in the JD brand overall, serving as a global retail beacon. And we're looking forward to talking on our second JD flagship in Chicago later this year with others to follow. Our individual brands continue to make good progress with Shoe Palace strengthening its position as a community-focused retailer in the west and south states, and we completed the strategic acquisition of DTLR in March 21, and it's positioned in the same manner in the Northeast. We also invested in enhancement of our CRM program, and I'm pleased to say that we now have almost 5 million active members of our status loyalty program. Behind the scenes, we've worked hard to improve efficiencies, and we've been driving forward back-of-house consolidation across a range of processes, including finance, logistics, distribution to help us realize synergies. In terms of external factors effect in our business, it's worth remembering that in the U.S. our stores were largely unaffected by COVID restrictions during this period with all businesses benefiting significantly from the federal economic stimulus, which was given directly to individuals boosting the income of low earning members of the population. Encouragingly, the positive trading performance continued through H2, softened after the peak holiday season as we experienced an anticipated shortfall in the supply of certain key footwear styles. And whilst supply has remained limited in the first half of the financial year, it has substantially improved and will continue to improve during the course of the year. Lower inventory has led to less promotional activity across the industry, and this has led to a growth in gross margin. We would not expect promotional activity to revert to historical levels, and so would expect to retain most of this gross margin benefit into the long term. And now I'm going to hand you back to Kath Smith, who will talk through our other key markets.

Thank you, Wayne. Next slide, there we go. Turning to our next largest market, the U.K. and Republic of Ireland. Here, we delivered a combined record profit. This was achieved despite sustained COVID store closures. We enhanced flexibility of our operations on the true omnichannel nature of this business. Growth in store sales continued to be matched by a significant progress online, and we have invested significantly in our store portfolio to deliver the ultimate omnichannel experience. We opened our Westfield Stratford flagship, which is the most technically advanced in our portfolio. Following the pandemic, we have seen increased recognition of the health benefits of spending time outdoors, which has driven strong demand for outdoor living and cycling categories. To meet this, we strengthened our position in the U.K. premium cycling market through the acquisitions of Wheelbase and Leisure Lakes each leading omnichannel retailers of bicycles and associated accessories. As we alluded to, we are bolstering our logistics capabilities further with a new 515,000 square foot facility in Derby, which will begin fulfillment of JD online orders later this year. And our new 65,000 square foot warehouse near Dublin is now fully operational. Turning next to our operations in Continental Europe, we have significantly increased our retail presence by our new openings and acquisitions. We now have our first presence in Eastern Europe following the opening of our first store in Hungary, post year-end, and JD now has a presence in 14 markets across Europe. This expansion is against the backdrop of difficult operational environment with continued store closures across the continent and mixed performances on reopening. We remain confident in the long-term opportunity across the region and are committed to expanding our physical retail presence with a headline target of one store opening per week on average in Europe. Finally, in the Asia Pacific region, we're experiencing difficult COVID-related trading conditions. Australia delivered footfall closest to normal levels and we regard the country is a very important market, trading now from 40 stores at period close. Elsewhere in the region, we opened our first store in New Zealand, and after year-end, welcomed our first 2 stores in Indonesia, Indonesia becoming JD's sixth market in Asia Pacific. Next slide, please. Let me turn our attention to M&A partnerships and omnichannels, starting with omnichannels. As I've mentioned already, our core retail estate is an enormous asset of this business, and one that will remain key to enabling us to meet the needs of our consumers. However, we're not complacent, and we know we have to constantly raise the bar and appeal to a demanding consumer by providing them with an exciting and connected shopping experience. We are striving to strengthen our digital presence. We are leaders in marketing to the Gen Z digital native audience, and we have increased our reach to the urban consumer, in particular to our JD Christmas '21 campaign, which was the #1 Christmas ad with 22 million YouTube views, rating #1 on both App Store and Android. And this is the first for JD. It was the most downloaded app both on Apple and Android phones simultaneously. And we also had a 95% positive sentiment rating. And we don't stop there. We understood early the benefits of TikTok and Snap and we are testing the data with Google to keep discovering what works. We continue to build awareness and attract our core 16- to 24-year-old consumer to stores through digital out-of-home signposting, and we are transforming stores to have more digital content to offer consumers the opportunity to interact with us. For example, our new store in Westfield Stratford and our new Metro store in Newcastle, which opens on Saturday. These stores are seamlessly connected to all channels: mobile, our in-store app where you can scan an item of footwear from the stock room and trial in store and our transactional kiosks. We are now an international multichannel business with multiple fascias and the group is investing in the operational foundations of our business to ensure that we remain a leader in multichannel development. We are well on our way in enhancing our distribution and logistics networks which includes new facilities, as Neil mentioned, in both the U.K. and Continental Europe. Next slide, please. Moving to partnerships. JD is the go-to partner for brands and those brands that want to reach the urban news market. They know we understand our consumer better than anyone with a focus on advancing and elevating urban news culture. Whether it's through our own involvement with festivals such as Longitude in Dublin or HipHopHuis in Rotterdam, we provide a special place where brands can connect with brands, products, influencers and consumers. And we're not just limiting ourselves to music. We are exploring opportunities in gaming because the rapid rise of eSports says we should do and we're also actively finding ways to connect with the JD consumer in the metaverse because our consumers spend around 50% of their time in the digital world it's natural for us to show up there with them and in partnership with our brands. Our unique connection with our consumers enables us to gain access to the very best products that our brand partners have to offer and allows the JD consumer to be at our aspirational sales wearing the clothes they want to wear and knowing it's the best of what's out there. Next slide, please. Moving to M&A. The group's strategic acquisitions have contributed almost GBP 126 million profit before tax to the group's record headline profit. Acquisitions will continue to be a growth engine in the future. The group completed on a number of acquisitions and investments in the period, which look to either expand the geographical reach of its premium sports fashion operations or widen the category offer to include other products which are relevant to a style-conscious consumer. This is what we call purposeful M&A. Acquisitions should and must be highly complementary to the group's portfolio. And a few in-the-air examples include: DTLR which enhances the group's exposure to key consumer demographics in the highly important East Coast markets in the U.S., and after completion, DTLR was transferred to the same subgroup is Finish Line, JD U.S. and Shoe Palace. And we anticipate further evolution of the property portfolio in the coming year with DTLR having the support of the international brands to expand its network of stores in its markets. The marketing investment group in Poland gives the group the presence in Central and Eastern Europe for the first time. More recently, the MIG team has acquired the trade and assets of a further 22 stores which traded as the athlete sport across Slovenia, Croatia, Serbia and Bosnia, Herzegovina, and are all new territories for the MIG business. These stores are currently being converted to Sizeer. The MIG team has also been instrumental in the opening of the first JD stores in Eastern Europe restored in Poland and Romania and since the period end, the group has opened 4 further JD stores in Poland, one additional store in Romania and our first store in Hungary. And finally, Cosmos in Greece and Cyprus gives the group its first presence in the east of the Mediterranean, which has been complemented in the current financial year by the commencement of a joint venture in Israel. We would anticipate further evolution of the property portfolio in the coming year with Cosmos having the support of the international brands to expand its network of stores in its markets. In addition, this acquisition further provides the group with an infrastructure and management team for the development of JD in Greece and Cyprus with the first 3 JD stores in Greece expected to open in the second half of this year, 2 in Athens and 1 in Barcelona. Let me now hand over to Mike Armstrong, who is the JD Group Buying Director. Mike will tell you about our special and unique brand partnerships. Mike?

Thanks, Kath, and good morning, everyone. So moving specifically on to the relationships we have for branded partners. If you could click the slide up, please. So quite simply, the bond and relationship we have with the brands is based on our coordinated consumer-led strategy. We have a shared commitment to elevate, innovate and connect with our consumers with a clear benefit for the brand of our ability to do this at scale. Our side of the bargain as a retailer is that we will continue to set the global standards for connected and elevated consumer experiences and access to the best and most relevant product from the world's most affinity brands where and when our consumers want it. This is the case today and will continue to be the case in the JD of the future. It's our obsession. We are in a unique position. We've got a clear, simple, effective and consistent strategy, we are differentiated from our competitors, and we have a brand that is powerful enough in conjunction with our branded partners to be able to shape the marketplace of the future. As a team, we are 100% committed to maintaining the momentum delivering against the strategy and ensuring that our consumer-facing proposition is as compelling and relevant as our consumers would expect from a season in and season out. As we move forward, this is what will drive and reaffirm the partnerships that we have. Next slide, please. Sorry, as I mentioned, our relationship with the brand is built on our strategy and our ability to execute. And this is a slide we share with the brands on a regular basis. The strategy framework illustrates how we will continue to shape the future of the business and outlines our approach to our consumers, our capabilities and our connections. It also provides the framework for the alignment we have with the brands. Firstly, and most importantly, our consumers, we believe that our -- the JD global consumer mindset represents the future of the [indiscernible] we operate in. We are a global player, and like our consumers, we have a global mindset, but the execution is defined by our consumers in their own communities. No other retailer in our space has proven to be as adept at delivering what our consumers are looking for whoever they are and this global mindset gives us a respective vantage. As well as this, the JD model allows us to serve multiple consumer groups and communities within each of the markets we serve through different banners and experiences. Our focus on innovation to drive a real easy and fast shopping experience, combined with some of the best retail locations in the world set is up for daily success. From a brand delivery standpoint, we have consumer-led in everything that we do. We are digitally driven in our approach to connected retail marketplace, we are membership enabled, which allows us to align consumer data and analytics in every aspect of our business, and this is an area we are investing in and developing follow. The JD brand continues to drive growth by reaching new consumers through acquisition. And finally, we also continue to invest in digital and supply chain capabilities that complement and connect to our physical retail locations. Next slide, please. So as we've mentioned, we are clearly differentiated from our competitors to what differentiates the JD brand can be simplified into 3 key categories: our unique brand perspective is grounded in our understanding of our consumers and it allows us to connect with them and wait our competitors can't. The JD brand also has a relentless focus on utilizing the power of stores to build memorable retail experience. We have the ability to engage with consumers across multiple categories and all genders. And finally, as digital leaders in the category, we continue to drive connection and commerce through our connected retail infrastructure and membership strategies, which moving forward will include an even closer relationship with our branded partners. Next slide, please. But what really drives our unique consumer connection is that we are the category destination for apparel. By default, this makes us the head-to-toe retailer of choice no other retailer in our space offers brands and consumers this opportunity. Next slide, please. So as far as our final strategy is concerned, and as Wayne's already mentioned it, the acquisitions of Shoe Palace and DTLR provide us with the perfect East Coast, West Coast complement to the U.S. JD Finish Line business, Size and Footpatrol offers access to top-tier distribution from the brands, Sprinter offers us a scalable sporting goods banner in underpenetrated markets. Yet again, we are in a unique position as we can offer both consumers and brands multiple touch points. Next slide, please. So with any trip into the marketplace, it's clear to see that we are in a pretty favorable position. The product proposition, our elevated retail experience, which showcases the brands in premium and exciting environment. Our differentiated positioning and the benefit to the brand at our scale across multiple territory brings results in the fact that parceled up the privileges rewarded to us by the brands are unparalleled. We have product exclusivity predominantly through our special makeup facility we have with the brands in all categories, which allows us to create the spoke product catering to exactly what our consumers want. This benefit is afforded to us because we have a far closer and more direct relationship with our consumer than the brands have. This gives us a deep understanding of what they want from us, and we're happy to share this knowledge with the brands. We have close-to-market programs, which allow us to be reactive to trains. We have prioritized on allocations. We have full product access due to the -- across the banners due to our store portfolio strategy. And we also benefit from the segmentation strategies that are implemented by all the brands to ensure the marketplace is differentiated. Next slide, please. And just before I finish up and hand back to Kath some of the highlights of where we have come and with the most significant partners are highlighted here. Commitments are in place, improvements are looking likely in the supply chain and ongoing changes to the brand segmentation and distribution policies will continue to benefit the JD Group. So to sum up, we are as weighted to the brand as they are to us. Our strategy is robust. The model is scalable, and we are differentiated and our consumer connection is unique. We are well positioned and more than capable of being able to build on incredibly solid foundations that we have and our relationships with our key suppliers to our business have never been stronger. So I will now hand it back to Kath for closing remarks.

Thank you very much, Mike. To conclude, I'd like to share a few reflections on what makes JD a success. We have a laser focus on the consumer. The ongoing strength of the business is embedded in this focus. Our teams live and breathe our target market and know our consumer better than any competitor. We have a differentiated product, which allows us to ensure we curate the right product offering to our consumers. We ensure it's differentiated by consumer taste, by market and by geographic region. And our fully integrated omnichannel approach enables us to reach the consumer wherever they are and wherever they wish to shop through our many fascias via in-store, online, through our apps and by our social channels. We believe we have created a winning formula. At the heart of which is JD, the group's largest and most profitable fascia and a brand and retail-led business that is considered the best in the world. We reach our consumers through our 5 pillars, and we have global reach, which continues to expand through our strategic M&A function focused on acquiring businesses that complement our strategic aims. Underpinning everything we do at JD are our unique partnerships with our brands. We believe these represent the engine that will propel and power this business into the bright future we envisage for this group, and of course, our people. Highly motivated, loyal and experienced teams who continually set the bar for retail and consumer experiences through best-in-class operations. It is JV's people who make JD perform at its best. To provide a view on the outlook for the current financial year, let me hand back to Helen.

Thanks, Kath. So in summary, we've made outstanding progress in the year to January 2022. And again, our thanks goes to Peter for his leadership and passion which has positioned JD so fantastically to enable us to take advantage of the opportunities that we see ahead. JD is a globally recognized iconic multichannel retailer with a proven strategy and clear momentum, and we are not changing that focus, and we continue to build the business at the pace everyone recognizes as JD pace. And we reassured with the ongoing trading to date this year despite what we recognize as being a challenging environment. And we expect profit for the year to January '23 to be in line with the record profit, which we delivered in the year to January 2022. So that concludes our presentation this morning. So I'll now hand you back to the operator, and we will be pleased to take your questions as we as a team are spread globally, I will share the questions and hand to the appropriate person to answer those for you.

[Operator Instructions] Our first question comes from Jonathan Pritchard of Peel Hunt.

A couple of things that Wayne and Mike said, just sort of piqued my interest. Could Wayne perhaps talk a little bit about the status program and say out loud and perhaps expand a little bit on that as to whether he's happy with social media and that sort of following that sort of thing. That's one. For Mike, you mentioned, I think, a little bit sort of data exchange information exchange. How much is that sort of point of difference or a key differentiator with the brand. Just a little bit of detail on that. And then just finally, on inflation -- product inflation and elasticity, is there a risk that they all pound on a par trains here and there might actually impact volumes? Or do we think that it's really an elastic?

Thanks for that. Thanks for that. Should we go over inflation first, Neil, do you want to pick that up?

Yes, sure. So our consumers, as you know, is motivated by desire. There have been price increases of products this year as everyone knows, in kind of mid-single digits. We're pretty encouraged with the resilience that we're seeing from the consumer so far. And their appetite for our products seems undiminished at this moment.

Okay. Thank you. Wayne, do you want to pick up the question, I guess, about the CRM and the loyalty program over the U.S.

Okay. So the CRM is a major part of our strategy in terms of our understanding of our consumer in greater detail, and therefore, staying connected to our consumer in greater detail. It allows us to accurately target and spend our marketing dollars more accurately in terms of reaching our consumer and the consumer that regularly spend with us. So very, very valuable in terms of data-driven marketing activity. So in terms of status, status is a core part of that. Finish Line did have a very good loyalty program, but it was just very outdated and it was margin erosion. It was way too expensive for us to continue down that line. But we realized how valuable that play was. So status was a move on. It was a modernization of the program, which is more experiential than cash-driven. So no one in terms of its cost to us, it's a fraction of what it used to be to Finish Line. But yes, very, very valuable part of our play. And we continue to recruit consumers into the status loyalty program. When we talk about active members as well, a lot of businesses require active numbers over a 2-year period, but the GBP 5 million that I quoted is active over a year and there's multiple purchases. And if you go back to the overall program membership itself, it's over GBP 31 million. So a massive program for us and a major move on.

Thanks, Wayne. And I think your third question, Jonathan, was around, I guess, data sharing the partner program. So I should pass that to you Mike.

Jonathan, we are expanding the partner program that we have with the brands, so we're expanding its reach with some of the other part brands that we have this year. Really it's as simple as that.

Our next question comes from Kate Calvert of Investec. Kate?

Just a couple for me. The first question is on your CapEx plans for the year. Could you expand in terms of the number of JD stores you're expecting to open by region in the U.K., U.S., Europe and Asia. The second question is on the U.S. with more supply coming through from the brand, are you yet seeing any pickup in promotional activity in the U.S. yet? And what are your expectations potentially for the second half? And the final question for you, Helen, is when you last spoke, you mentioned that the process of hiring new CEO would take to the end of the summer. Given you've got new candidates coming in, is that still a fair timeline?

Okay. Well, I'll go first with that one. Thanks, Kate. So we're well advanced now in the search for the CEO. That started some months ago now. And we've had some new candidates that have come into the process in the last month or so. So as you would expect, we're making sure that we consider all of the candidates. We've got some really strong candidates in the running, but you'll appreciate that as a Board, it's probably one of the most key decisions that we're going to make. So we need to make sure we get the right person, in the right cultural state somebody who's really going to take advantage of the opportunities we have ahead of us. So we continue with pace, and we want to get somebody in place ASAP. But equally, we want the right person. So we will update as and when we are comfortable that we have the right candidate. The same will -- is the case as well for the non-exec chair process. Neil, do you want to pick up the CapEx question?

Yes, sure. So in terms of the U.K., it might not necessarily be additional stores as such, there's a lot of relocations that we're doing to move us into bigger stores in key malls. So as Kath said, we've got Metro Center opening this week, for example. And the advantage of doing that is there are opportunities to get additional space of good economic rents at the moment, and it gives us the opportunity to expand the apparel mix in stores, in particular. So that will be the focus in terms of the U.K. plus with the other stores, just refreshing, making sure that we've got the latest technology in there that the consumer experience is consistent. In terms of Europe, we've got the target of 1 store a week on average across Western Europe. Initial openings in Eastern Europe. And then as Kath said, we've got 3 stores due to open in Greece this year as well. Asia Pac, openings more focused probably around Australia still where we still see a good opportunity. And then North America, 2 aspects really to the spend there. One is we are converting existing Finish Line doors, but we're also relocating a number of stores, again, taking advantage of the property market and looking to be in the prime positions within those premium mills. And then the final question then was on U.S. promotion activity, wasn't it? Wayne, do you want to talk about that?

Sorry, can you repeat the question, Kate, it broke up a little bit from my side.

Yes, sure. You've obviously got more supply coming back into the market from the brand. So you have benefited from much higher gross margin. Are you yet seeing a pick up in the promotional environment in the U.S. as a result of more stock coming back in?

I think as you know very well because you've studied the market very well, it's always been a very competitive market. I think COVID changed the dynamics of it a little bit and supply into the market meant that there was fewer promotions, but it still is even today, even with the tighter products at the start of the year. We've still got a lot of promotional activity from the likes of Foot Locker coming out of Nike really. And also other brands themselves, in particular, Adidas. I think what we tend to do, from a differentiation perspective, it means that we don't have to follow suit in terms of coupon offers or ticketed offers in any way. So, yes, just like anybody else as part of our inventory management, we do throw the ad offer out there. But from our perspective, no, with margin strong, we don't see that changing much. We see our position strengthening substantially as we continue into the remainder of this year. And now from our perspective, every message we put out to the consumer is about premium retail. But yes, there are -- there is heightened activity in the marketplace, but that's nothing new for the U.S.

Our next question comes from Graham Renwick of Berenberg.

I just have three, if that's okay. Just on U.S. profitability. So you said you'd be a margin of 14% across the year. I think you were at 18% in H1, so it implies H2 sort of step down to 10% or below, and that's obviously despite promotional activity remaining quite low. So just wanted to know the reasons for that step down in profitability. And then where should we assume margins, what margin you're aiming for, for fiscal '23? And how should we think about that developing in the midterm? So that's the first question. Secondly, on inventory. So at year-end, end of January, you were down on an underlying basis. Where is your inventory positioning today? And how much growth are you buying for across H2? And then I guess more generally, how are you feeling about the pipeline of new product launches across the second half as supply constraints are easing. And then lastly, on cash, you obviously have a very strong position. You don't typically pay big dividend or do buybacks and you're generating cash flow in excess of your CapEx requirement. So how should we be thinking about the uses of that cash? Should we be expecting more larger-scale M&A like we saw last year, particularly in this tougher market environment and what would be your priorities there?

Thanks for that, Graham. I think there's a sneaky extra one in there. I think there were 4 questions, not 3, but we'll let you off. Neil, do you want to pick up the one around U.S. profitability first half versus second half margin in '23?

Yes, no problem. So yes, the first half margin was exceptionally strong. But that was consistent with the fact that the strong growth that we saw that came through from the stimulus was very much focused in stores. And so yet exceptional leverage from what is largely a fixed cost base. Second half of the year was probably more normal in that regard. And then obviously, towards the end of the year, entailed offers as the supply chain challenges then started to have an impact. So where do we see U.S. margins kind of long term. We've previously said where we're at the moment in terms of, say, low teens, we think that's sensible. Our target initially when we acquired Finish Line was to get it to 10%. And we've gone further than we expected faster than we expected. So to take it beyond these levels, it's really, as we've talked before about getting the apparel sales, in particular, motoring within the market.

Do you want to pick up those around the inventory position, underlying position at year-end versus where we are today?

Yes. So I mean, inventory positions at the moment are normalizing. We've got certainly in our 2 biggest markets of Europe and the U.S., we've got more stock than we had this time last year. Footwear, in particular, that's been in short to supply is certainly more normalized now and that position will continue to improve during the course of the year.

Mike, do you want to pick up on, I guess, product launches for the second half and how you're feeling about that?

Yes. I mean, obviously, launch is a more -- it's more dominated by the footwear business, but we've got a pretty well balanced portfolio of brands and categories that we operate. And so we aren't massively relying on launch products in any case. But that being said, with the improvements that are looking really likely in the as we head into the second half, then yes, there's certainly more newness and availability of that product coming through the second half. So yes, there is an upside down.

And Neil, how are you thinking about using all your cash?

Yes. You're right. We do keep dividend modest, and we do a lot to retain the cash in the business because we think we've demonstrated over a number of years that we invest cash in the right places, we're certainly not going to talk about any specific M&A activity. But the -- we'll be using the money to invest in the business, both the retail estate technology improving the consumer experience with selective M&A as appropriate.

Okay. Hopefully, that answers your questions. for Graham.

Our next question comes from Grace Smalley of JPMorgan.

I have 2 questions, please. The first one, just on current trading. I think if we compare your update today to the update you gave last month, it does seem to imply a slight slowdown over the last month. So Neil, I guess, given your comments that your consumer is holding up relatively well so far, could you just comment on what's driving that difference over the last month? And then Secondly, on the U.S., could you just break down kind of what your guidance really assumes for sales development in the U.S. and how that compares to first half versus second half? And maybe whether you've started to see any signs of improvement in the U.S. top line over the last couple of weeks as inventories are starting to improve, and I guess you're moving away from some of the very, very tough comps from last year.

All right. Thanks, Grace. It sounds like 2 for you, Neil.

Yes. So in terms of current trading, so the last update that we gave before today was at the end of Q1. In terms of the U.K., you're right. We did say it was a bit more than 5%, and it's now at 5%. So well done on picking that one up. As well, the main reason for that is a slight slowdown in the U.K. So the U.K. at the time after Q1 was closer to 10% than it is now. I wouldn't read anything into that, 2 main factors to discuss. One is last year, May was very strong. We were still in the kind of opening bubble that came through when the stores reopened. So England reopened 12th of April, but Scotland, for example, didn't come through until the 26, I think, it was. So there was still a strong preopening bubble in May. Plus obviously, 12 months ago, we were also through the course of May building up to the Europe's football tournament which -- that does bring some kind of volatility every 2 years or so when you have those football tournaments. In terms of U.S. and what we're assuming, we are expecting U.S. to drop back in the first half of the year. That's not surprising given the impact of the stimulus, U.S. sales are probably relative to last year, kind of mid-teens or something like that below where they were 12 months ago. That will start to ease. It's interesting, I've said to all the people this morning last week was the first week actually in the U.S. this year that we were actually ahead of last year, which is -- which is consistent with that stimulus running out a team 12 months ago. So here on in, we're probably assuming kind of probably flat on last year through to the rest of the year.

Our next question comes from Charlie Muir-Sands of BNP Paribas. Charlie?

Congratulations. The first thing was I just wanted to go back to your group of guidance. I know you've talked to your geography so far, including just in the last answer. But just sort of overall, in order to reach flat profits for the year, what roughly do you need to achieve in like-for-like businesses in the remaining 8-ish months you've got left to run. Secondly, in the U.S., you've stated that expectation you can look at most of the gross margin gains from lower markdown. I just wondered what makes you think that the industry structure has changed so much that promotional levels activity will be much lower on the fall gross margin benefits that you reached during type period of inventory are going to be retained? And then finally, just also selling with the U.S., you talked about some of the activities around back office synergies that you're driving before. I just wondered if you had any sense of what the scale of the benefits will be as you deliver those.

Thanks for that, Charlie. I think let's pass all 3 of those off to Neil, if we can.

So in terms of the guidance for the rest of the year and flat profit, it's really consistent with probably sales levels broadly consistent with last year. Yes, that gives us incremental GPV, but we're assuming that gets offset by incremental cost in the business, largely coming through from labor utilities plus we've got, obviously, there's some kind of preopening -- significant preopening costs relating to some of the warehouse development, et cetera, that we're doing. So that's the kind of shape there. In terms of U.S. structural change, then there's fewer I suppose there's fewer competitors within the market, there has been quite significant consolidation within the U.S. and some of the smaller operators have been seeing their supply reduced or potentially even eliminated, and that's led to consolidation, particularly within malls, where certainly, when we first went into the U.S. in 2018. Nike was overexposed in that mall environment, and there's been a real focus on reducing that down primarily so it raises standards for the consumer. So you've got businesses who are focused on so that the benefits for the consumer. And then in terms of U.S. back office synergies, a lot of them are operational in nature rather than cash focus. They're more about, again, so by sharing warehouses, inventory systems, et cetera, it just means that you can fulfill online orders to the consumer quicker because you can select products from the nearest warehouse, et cetera. So it's more about enhancing the consumer benefit we should hope would lead to top line benefit further on rather than it being necessarily a cost-saving initiative.

Our next question comes from Simon Irwin of Credit Suisse.

Can I ask 3 questions? First I guess it's for Kath, just in terms of thinking about the long-term structure of the business and the industry, you're obviously very reliant on 1 big player, which is increasing [indiscernible] and at the same time, the market does appear to be fragmenting into smaller brands. So can you just talk about kind of how you see that evolution playing out for your business in particular? The second, which I guess is probably for Helen is just if you can just talk a little bit about whether there are any other issues kind of in the background that we're not -- we don't know about. So obviously, there is 3 CMA issues with [indiscernible] and 2 on [indiscernible] and a very small issue around the FCA. But can you just kind of confirm to the market that there's nothing else that we should be aware of that you know of? And thirdly, Neil, if you can just take us through the Genesis Topco issues in terms of that provision and how that relates to the [indiscernible] family.

Okay. No worries, Simon. I'll go first. So as you're aware, we've been working on the different governance streams now for a good 6 or 7 months. So we have been very thorough in really making sure that we assess our compliance with certainly, the corporate governance code but also all of the regulatory standards as well that you would expect. And KPMG also have been very thorough within their scope of their work given the complexities of the business and obviously, the number of acquisitions that we've been doing. So I would say that we have done a pretty thorough deep dive to really understand the business where we are and baseline that position and then come up with a plan over the next 18 months, so it will take us on a journey to get us to a place where as a Board, we feel is appropriate for JD and also the size and scale of the business going forward. That is going to be an ongoing journey. You can never say never because it will be remiss of me to say that we will ever see any other issues. But from what we know today, with all of the work we've done, we have a good handle of where we are and what's happening. And we recognize that if there was anything more significant, then of course, we would have had to have flatten that already. So as a Board, we were uncomfortable that we know as much as we can, given the depth of the investigation work that we've done. Neil, do you want to pick up on Genesis Topco?

Yes. So you're presumably you're referring to the put option charge, which is a good bit of technical accounting that really relates to the fact that obviously, in a put option, we're not in control of that. So those minorities to do our puts, they take put at some stage in the future at the time of their choosing. So from a technical accounting perspective, you need to recognize the liability of that. And given how the U.S. business has performed in the year, then that flows out into say, future forecast, et cetera, and by definition, what you may have to pay in the future based on your formula calculation of earn outs and options, et cetera, that value goes up and so you end up with a charge accordingly. It is somewhat odd that it goes through P&L, but that's accounting for you and us and when options get exercised whether we call out all the puts than this charge effectively reverses.

Kath, do you want to pick up around, I guess, our longer-term structure and the brand?

Simon, as I alluded to in the presentation, what we're doing and how we're doing it and our strategy isn't going to change right now. Obviously, when a new chief exec comes on board, they may have some ideas of slightly amending the organizational structure. But right now, it's absolutely fit for purpose. That's one thing. The other thing is that you mentioned the one big player who's got a heavy-duty B2C strategy. There are a number of big players. Of course, there's one that we know about. And I would say that having had gosh, getting on for 10 conversations with them in the last 4 weeks. But they are every bit of focused on their wholesale partners and the wholesale business as they are their B2C proposition. As far as the smaller brands coming through into the marketplace, your point there is concerned. There are always small or niche brands coming through. JD's read on the market is exceptionally strong. And so they know which brands to partner with and which brands to pass on. And what we're doing constantly is nurturing those brands that offer the greatest potential for JD.

Our next question comes from Edouard Aubin of Morgan Stanley.

So 2 questions for me on the -- specifically on the U.S., I guess, for Wayne or Neil. The first one is we could get an update, please, on the conversion and integration process in terms of top and bottom line uplift either from your conversion of Finish Line to JD stores or the integration of DTLR and Shoe Palace, so that would be helpful, number one. And number two, in the U.S., I know there is no good market share that are out there. But could you please give us a rough range and an approximate range of where you think you are in the U.S. And if possible, how it compares to the U.K.? And is there any structural reason for your market share in the U.S. long term not to be in line with that of the U.K.

Okay. So Wayne should we go to you first around market share situation?

I think the acquisition of the 2 players on the East and the West give us a massively broadened consumer appeal. So we're able now to get right into the heart of some of the more ethnic communities. And with JD staying as the major core player through the bigger malls and the bigger high streets in the U.S., if we go back to just that position, then it would have been restricted in terms of what it could have achieved over the long term. But actually, with the acquisition of DTLR and Shoe Palace, that means now we are relatively unrestricted in terms of our reach and if you know our market well, you know that it isn't just about the mall locations, the street locations is we refer to. And they are not like European street locations. These are street malls and they are not [indiscernible], and JD couldn't exist in the lots of them whereas DTLR and Shoe Palace kind of do because of their community reach. So as far as in terms of market share, I opened my fashion by saying that there is a massive growth potential and there is, there is still at least 150 premium malls that JD needs to go to and look at and you're constantly looking at, and you'll see in the 65 doors that we're going to open this year, you'll see a lot of new doors in the big malls, Avintures, the West Coast plazas, et cetera, et cetera. So there's a lot coming up in terms of JD's movement, and we've also got permission to grow from the street and a community perspective, both from DTLR and Shoe Palace. So I can't say, in terms of our growth, in terms of our expectations, we're very ambitious. And really, that's all I can say. The expansion potential is phenomenal, and it's only going to be restricted by our relationship with the brands and their willingness to allow us to grow and expand. But at the moment, brands are very, very friendly to JD's growth and certainly that of its subdivisions, DTLR and Shoe Palace.

Thanks for that, Wayne. And Neil, do you want to pick up the question on, I guess, integration and store conversion in the U.S.

Yes. So we've said publicly before that we see uplift of around 20% when we're doing these conversions, and that's unchanged. We do see that kind of growth.

Our next question comes from Richard Chamberlain of RBC.

Two for me, please. I wondered if you could just comment a bit more specifically on the performance of the recent U.S. acquisitions in the year-to-date performance, Shoe Palace and DTLR. And then second, I guess, Neil, what sort of cash flow impacts would you expect from the exceptionals that we're seeing today. I think it's note 3, isn't it that goes through those? And I presume none on this sort of fair value movement of the put options. But what are the sort of likely cash flow impact of the exceptionals, that's the question.

Thanks, Richard. I think both of those to you, Neil.

Yes, they are. So in terms of Shoe Palace and DTLR are pretty consistent really with how Finish Line is performing really. Shoe Palace has a lower mix of apparel within its business or historically about the lower mix of apparel in its business. So that's been perhaps more impacted by shortaging like availability of footwear but its apparel mix has been growing substantially over 10% now. DTLR naturally has more apparel. It's over 20% in the mix. So it had a bit more -- it's been a little more sheltered from some of the footwear challenges this year. So -- but broadly, the 2 businesses have tracked very consistently with Finish Line. Then in terms of the cash flow impacts for the exceptionals, there's kind of none at the moment, if that makes sense. So the fair value of the put options, that's a noncash charge. And as I say, it only runs cash outs and when options get exercised and we acquire some or all of that minority share. And then the other 2 items, they were -- they were cash movements within the year.

Okay. And just back on the U.S. then. Is there an FX benefit or more of an FX benefit now in the sort of reiterated guidance, I guess, for the year because of the weaker sterling trend. I mean I guess you have a bit of headwind sort of own label sourcing and so on. But is there more and I presume there's more of a U.S. dollar benefit now? Is there in the guidance?

Yes. You've got to be careful about looking at FX because it's incredibly volatile. So if you look at where the FX rate was for the dollar at the start of last year and where and these things can move very quickly and unpredictably. But then you've also got to remember as well that we've got quite a substantial European business as well. And so there is some kind of offset in terms of how Euros go as well. So I wouldn't read too much into FX statement.

All right. Thanks very much, Rich. I think we've got time for one last question.

Our final question comes from Olivia Townsend of UBS. Olivia, the line is yours.

I have short questions. First one, just on return rate. So I appreciate return rate dynamics in footwear a bit different fashion. But given comments from some other U.K. retailers recently about increasing return rates and the potential for that to be linked to consumer weakness seen any change there over the last 1 or 2 months? Secondly, on use of deferred payment methods. Again, it's linked to the first question around consumer weakness. I'm just wondering if you've seen any sort of meaningful uplift in consumers using Klarna or ClearPay that kind of spend over the last few weeks? And then finally, just a clarification point around U.S. comps. Could you just remind us of the Q3 and Q4 like-for-like comps and how those compared to the similar period from last year.

Neil, do you want to pick up those 3?

Sorry. Yes. So in terms of the return rates, then there's nothing to see there. We've not seen any increase in the return rate either online or into store. In terms of -- your question on deferred payment methods, then that's something that we offer online only. If we don't do that, we don't offer that in store, we offer that because it gives the consumer choice in terms of different payment options, and it gives them -- the choose the option that's right for them. That has been a small uplift as opposed but nothing noticeable. It's not accelerated if that's the point that you're making. It's become a more popular payment method over a number of years and trends just kind of continuing on that. And then in terms of comparisons for last year, obviously, we have the phenomenal growth in the first half of last year. But then second half of the year was broadly flat on the previous year. So it's the same in all markets, really, the second half of the year is probably the first time in 3 years really when we're kind of clean on unclean really from a 1-year perspective and we'll be able to get a true read on performance.

Okay. Perfect. Well, thank you very much for all of your questions, and thank you for joining us this morning and have an amazing rest of your day. Thank you very much.

This concludes today's call. Thank you for joining. You may now disconnect your lines.