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

Good day, and welcome to the JD Sports Update to Markets webcast and conference call. At this time, I would like to turn the conference over to Dominic Platt, CFO. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining our call today. I am joined this morning by Régis Schultz, our CEO. I was saying a few words on our proposed acquisition of Hibbett, Inc. in the U.S. that we have announced this morning. We'll then be happy to take any of your questions. Growth in U.S. is a core element of our strategy, both for the JD brand and for our complementary concepts -- proposed acquisition of Hibbett increases our scale in the world's largest sportswear market. It sits very neatly alongside our existing complementary brands in the U.S., and it underpins the continued growth of the JD brand in the U.S. through its scalable platform. Turning to Hibbett. In the 53-week to January '24, same year-end as JD Hibbett revenue was $1.7 billion. EBITDA was $186 million and PBT was $131.6 million. Hibbett complements our existing portfolio of suppliers in the U.S., and its brands are well regarded by their local communities are seen in good NPS results. It has over 1,150 stores, offering a wide range of premium brands across footwear and apparel with the sales mix consistent with our existing U.S. businesses. Hibbett stores are located mainly in local communities across 36 U.S. states, where JD as a group is less well represented. The concept resonates well with their customer base and who the majority is 24 years old and under, again, consistent with our existing businesses. All of which means it is highly complementary with limited overlap with our existing growth plans. We have developed a strong digital platform, which underpins a leading omnichannel experience with close to 20% sales online, all supported by an efficient supply chain and logistics platform. They are also one of the few established Nike connected partners in the U.S. There are 7 core benefits to JD from this proposed acquisition. It's an attractive acquisition aligned with our strategy. It expands our reach in the largest athleisure market. It brings a complementary store portfolio. We continue to enhance our branded partnerships. It has a scalable platform underpinning future growth and synergy benefits. It has a strong and experienced management team, and it is earnings enhancing in the first full year before synergies, which we will deliver over the medium term. As you all know, our strategy is based on 4 key pillars, and this acquisition touches all of them. But just as a reminder, they are JD brand first. This is our focus on growing our core brands, JD complementary concepts, creating a wider brand ecosystem, JD beyond physical retail, developing an efficient and profitable infrastructure for our customers and our business. JD people, partners and communities, how we make sure we attract the best talent -- maintaining strong brand profits from the acquisition, growing scale in the U.S., a core strategic growth market for the JD Group. We already have clear growth plans to roll out the JD brand. And while there may be a few conversions over time, the JD brand will benefit from the addition of a strong platform that Hibbett brings to JD North America. Primarily though, Hibbett deepens our U.S. coverage through expanding our complementary concept segment. Hibbett adds to the presence we already have in communities through Shoe Palace on the West Coast and DTLR on the East Coast and a strong platform will benefit our existing complementary brands, too. The U.S. is the largest sportswear market in the world. It had a value of $121 billion in 2023 according to Euromonitor. With that in context, this is 4x the size of our 4 core EU markets of France, Germany, Italy and Spain combined. This proposed acquisition builds on what has already been a strong track record of growth in revenue and profit in the U.S. for JD. It started with the acquisition of Finish Line in 2018, the rollout of the JD brand across the whole of the U.S. and the complementary brand acquisitions of Shoe Palace and DTLR. The acquisition of Hibbett complements our existing geographic presence in U.S. communities, while at the same time, accelerating our overall scale to just under $6 billion on a pro forma basis, taking the weight of the U.S. within the group to over 40% of sales. And as outlined on the previous slide, given the scale of the market, there remains significant headroom for organic growth of JD and complementary brands in the U.S. One way of highlighting this complementarity of Hibbett is looking at the map of the U.S. It strengthens our complementary brand presence across the South and Southeastern U.S. alongside existing heartlands on the West Coast with Shoe Palace and the East Coast with DTLR, extending the breadth of our brands in U.S. communities from coast to coast and complementing the plans we already have to roll out with JD brand nationally. Hibbett has a strong portfolio of brand partners and strong relationships with the key global brands. It also brings a suite of new brands to the group that resonate well with their customer base. Hibbett brings with it a stainable platform. They have developed a very efficient supply chain with strong logistic capabilities, and they have invested well in their technology infrastructure and back office systems, both of which underpin a well-established on the omnichannel capability. All of these elements will provide additional support for the continued growth of JD in the U.S. as a whole and provide an opportunity for cost synergies. We estimate that these synergies will be at least $25 million over the medium term. We will provide more detail on our synergy plans following completion. Hibbett also brings with it a strong and experienced management team. We've been impressed by them as we've worked with them on this deal, and we're pleased that they will remain with the business post-acquisition. We very much look forward to working with them after completion. So lastly, turning to the terms of the transaction. We will be acquiring 100% of the share capital of Hibbett at $87.5 per share. This implies an enterprise value of approximately $1.1 billion or just under GBP 900 million on a business that generated $184 million of EBITDA in its recently ended FY '24 financial year. We will be funding the transaction through utilizing existing cash resources of $300 million from cash that we have built up in the U.S. and we fund the $800 million balance through a $1 billion extension to our existing bank facilities. In addition to this facility, we will also continue to have access to our existing GBP 700 million RCF and $300 million ABL facility. The transaction is expected to be accretive in the first full year of ownership. And over time, we will benefit from synergies. As we have said, senior management will be retained. And in terms of timing, the transaction is subject to customary conditions such as Hibbett stockholder approval and U.S. antitrust clearance, but we hope it can close in the second half of 2024. And so to recap, growth in U.S. is a core element of our strategy, both for the JD brand and for our complementary concepts. The proposed acquisition of Hibbett increases our scale in the world's largest sportswear market. It sits very neatly alongside our existing complementary brands in the U.S., and it underpins the continued growth of the JD brand in the U.S. through its scalable platform. Thank you for listening. And now we can hand over to you for your questions.

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

Thanks. And good morning, great acquisition, it appears. Just a few on store portfolio, et cetera. Are there any sort of material CapEx needs? Are the stores all in pretty good shape? Or would they use a liquid paint. And is there a new store program that you'd like to either enhance or just sort of endorse? Just a couple of [indiscernible] ones. What percent is apparel in the mix? I know you said it was like some of the other brands, but what precisely is that and what is Nike in the mix as well in terms of percentage of sales? And then just perhaps a little bit on your discussions about internal discussions about rebadging. I get that it has local presence, et cetera. But then again, it is in 36 states, which is a pretty big number. Was there a long discussion about whether these would go down the Finish Line being rebadged -- or is there a pretty open discussion that it wouldn't be?

Along this, JP, thank you very much. We'll try and make sure we deal with all of them. In terms of the store portfolio, I think our view is it is well, well invested. They spend $60 million to $70 million a year of CapEx. And the last portion of that actually goes on ongoing refits and refurbishment. So in our view, the store portfolio is in a good shape. And they have been opening additional stores and we expect that to continue in the same way that our existing complementary brands, Shoe Palace and DTLR have also continued to expand their footprints in their territories. In terms of apparel, it's just under 20%, which is broadly consistent with what we see in our other U.S. businesses. Do you want to talk about the rebadging?

Yes. So there's -- in terms of rebadging, there is no plan to rebadge the store. So this is -- I think we believe strongly that we have in the U.S. 2 proposition, one with JD, which is a global proposition in [ A and B ] mall in key locations, which we continue to develop, and we continue our program to rebadge Finish Line store to JD. On the other side, we recognize that there is a market for -- which is a convenient market, which is in the community and that with small store and that is where we have Shoe Palace, DTLR and City Gear that are responding to this customer and a very local and very close relationship, we will continue to do that. So there is no plan to rebadge stores.

And just on your question about the Nike percentage, it's consistent with our other U.S. businesses.

With a market...

Consistent with the market, yes.

We will take our next question from Chris Molly from Morgan Stanley.

My first one, apologies if I missed it. I think you mentioned that the deal will be earnings accretive within year 1, even before any synergies achieved. Could you help us quantify just roughly, like is that low single digit, mid-single digit? How should we think about the earnings accretion in the first year? And then my second question on the synergies. So you've highlighted that you expect to achieve at least $25 million of synergies. I know you said you're going to provide further details on that at a later date, but perhaps if you could just help us high level where you see the potential areas of buckets to achieve synergies and whether as you go on, there could be further potential upside to that synergy figure? And then my last one just would be on the store footprint. If you could just confirm the existing store portfolio, how much is mall versus off-mall and whether you would anticipate any store closures or whether you overall -- the overall store portfolio is healthy as it stands?

Thank you, Chris. So on the earnings piece, yes, absolutely, we expect it to be earnings accretive in the first full year of ownership around low to mid-single digits before synergies.

And in terms of synergy, so -- the way we look at synergy is mostly around back office supply chain. They have a strong and very efficient supply chain. I think that this could be leveraged for the rest of the group, especially for the development of JD, but for the rest of our complementary of 2. So we are expecting synergy to come from back office integration and supply chain and really giving us a platform to develop further business and [ click ] our business in the U.S. In terms of location, it's 80% street location, 20% mall. So it's more, it's really about all the -- if I take an analogy, and I think that you have the destination store, JD is the destination store, where you take your car off an hour, you go to the big mall and you get a fantastic experience. And you have the store which is next door to you, which is 10, 15 minutes' walk or car, and that is where Hibbett is doing a great job. And that's what most of the state is about.

We will take our next question from Manjari Dhar from RBC.

My first question is just on the...

Can you speak louder, please. it's difficult to hear you.

Sorry, is that any better. My first question is just on the Genesis minority in the U.S. How is that affected by this deal? And does this change any of your plans for that minority stake going forward? And the second is just on Hibbett sporting equipment business. I appreciate you said there was a similar sales mix to the rest of the U.S. business. But I guess, do you have any plans for that support equipment business that Hibbett has?

So Manjari thank you. On the Genesis piece, as you know, 19% to 20%, Genesis hold all of our U.S. business. Genesis will be acquiring this business. So we will retain -- remain in a situation where we own 80% and our minority partner continues to own 20%. It will be funded from within the U.S. business and will be sharing in the risk and rewards equally and that those arrangements remain in place.

Concerning the mix, I think that what is great about having a new business part of the family is to learn from that. I think that they have a great success in Denim, which we have not been so successful. So I think that there will be something to learn. I think we have a huge expertise in terms of apparel and then of what we have done -- on doing with JD. So I think there will be [ cross-fertilization ] and cross learning by putting the 2 businesses together. And I think that's really about what we are looking at. They do a little bit of sporting goods in some of the stores, so the same in terms of accessory that could be something where we can develop an offer. So I think that you -- as you know, when you put business together, you learn and you improve your offer.

We will take our next question from Joseph McNamara from Citi.

Excellent. It was just on, I guess, again, another question on geographical overlap. You talk to kind of put into a number and what proportion of overlap you've seen between Hibbett state and yours. I guess where is the most significant overlap and how will you approach this overlap in these areas?

Joe, I think as I said at the outset, this is a highly complementary acquisition. We are in our complementary brands, less well represented in the South and Southeastern states. And consequently, the overlap in our stores is really at the margin when you take the whole store state into account.

[Operator Instructions] We will take our next question from Kate Calvert from Investec.

Two questions from me. The first question is, could you give some background to the deal in terms of how long you have been talking to Hibbett? And my second question is about infrastructure. What does this deal mean for you in terms of your sort of future U.S. vision for your infrastructure of having sort of 3 key depots? Does that vision change at all?

So I think we have been in discussion with Hibbett for the last 4 months, and it has been very fruitful and really I think that if we had to do a deal, I think it's because we share the same vision around how the market philosophy in terms of looking after the consumer being customer-led and the way we do business. And I think that -- that's really something that we have worked along with them and to make sure that we have really a common view of the future and the strategy for the U.S. market and the way to organize ourselves. In terms of the supply chain, it's -- as you know, we -- this year in Indianapolis is saturated, and we cannot provide as a platform for the future growth of our JD business. So -- and at the same time, the warehouse in Alabama is -- has more capacity to do more business. So you can see easily a scheme where we can cover the full country in the most efficient way by leveraging their expertise in their supply chain as they sell the full country from Alabama and the fact that we have a warehouse just building in the west and one more in the north. So I think that we are -- this will be something we will work on, but they have the right expertise, and they have a cost to sell the store, which is much less than our cost. So I think we will learn from what they do in order to deliver some synergy around this deal.

[Operator Instructions] We will take our next questions from Olivia Thomson from JPMorgan.

I've got 3. The first is just, do you envisage that being any sort of integration costs in particularly the first year of acquisition? Second, Hibbett like-for-like has lagged JD in the recent past. I'm just wondering how you see the 2 businesses working together to improve that going forward, if that's something that you can comment on? And then finally, just -- I mean just to know whether there are any significant differences between full price sell-through versus the JD business?

Olivia, thanks for those questions. On integration costs, you're right, we'll provide more updates on that post-completion. But I think as a rule of thumb 1x to 2x the -- in benefit would be a good starting point.

Concerning Hibbett like-for-like, I think it's -- I think that they have benefited a lot from COVID. I think that because that was the benefit for all the convenience store. You're right that the like-for-like in the last year has been less impressive than the one of JD. But at the same moment JD, we are developing new stores. There is more new stores in the state and in Hibbett. And I think that they have been facing some issues in terms of overstock at the end of the COVID because of the disruption of the supply chain. And I think that they are now in a good shape for the future. In terms of full price, we have not been in such detail, but what we understand is that it's quite similar to our complementary business in terms of the mix between full price and a little bit of more excess stock, as they have said, following COVID disruption of the supply chain.

It appears there are no further questions at this time. I will now hand over back to Mr. Dominic Platt for any additional or closing remarks. Please go ahead.

So just to recap, and thank you for your questions. For us, growth in U.S. is a core element of our strategy, both the JD brand and our complementary concepts. And this proposed acquisition of Hibbett increases our scale in the world's largest sportswear market. It sits very neatly alongside our existing complementary brands in the U.S., and it underpins our continued growth plans for the JD brand in the U.S. through its scalable platform. Thank you for joining the call this morning. We look forward to speaking to you again in the near-term.