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

Good day, and welcome to the JD Sports Fashion Second Quarter Trading Update. [Operator Instructions] Finally, I would like to advise all participants that this call is being recorded. I'd now like to welcome Dominic Platt, CFO, to begin the conference. Dominic, over to you.

Thank you, and good morning, everyone. Thank you all for joining this JD Sports Fashion Plc Quarter 2 2025 Trading Update Call. This is our first scheduled quarterly trading update as part of our improved governance and transparency. We look forward to updating you on a regular basis in the future. I'm Dominic Platt, Group CFO. And with me on the call is Regis Schultz, our Group CEO. Hopefully, you've had a chance to see our statement earlier this morning. And on this call, I will give a brief summary of the statement, and then we'll hand it over to you for questions. Let me start by saying that our quarter 2 trading clearly reflects the strength and agility of our multi-brand model and our retail excellence. And at the same time, we have continued to deliver on our strategy. So in what continues to be a volatile market environment, sales in the second quarter were in line with our expectations on a constant currency basis. We achieved like-for-like sales growth of 2.4% and organic sales growth of 8.3%. This meant we ended the first half with positive like-for-like of 0.7% as we suggested after Q1 and organic sales growth of 6.4%. The trading improvement was also reflective of softer comparisons with last year in Q2 than in Q1 when we were up against a circa 15% like-for-like growth rate from the previous year, which did in part reflect the unwinding of COVID impacts. In Q2, the comparative was 3.4%. From a regional perspective, our largest region, North America, achieved a strong 5.7% like-for-like sales growth in Q2, led by JD and Shoe Palace while the U.K. saw a good improvement from Q1 to Q2. Our competitiveness in the U.K. improved quarter-on-quarter, while in Europe like-for-like growth was strongest in Southern and Eastern Europe. From an organic sales perspective, we achieved double-digit growth in the period in North America, Europe and Asia Pacific, the three regions where we're investing in new stores. Turning to our segments. Q2 like-for-like growth was achieved in our three main segments: JD, Complementary Concepts, and Sporting Goods & Outdoor with the JD brand achieving 11% organic growth on top of 2.7% like-for-like, driven by those new stores being opened across the globe. Now turning to gross margin. Gross margin in Q2 was 48.4%, 30 basis points down on last year. This was driven mainly by apparel, where the market continues to be promotional, particularly online and in the U.K., reflecting its higher penetration in apparel and online. And following the poor weather at the start of the quarter, the U.K. saw better apparel sales later in the quarter, which coincided with the seasonal sales period. First half group gross margin was therefore 48.3%, 10 basis points below last year. Our core markets have been competitive through the first half, though we have seen signs of better price discipline in recent weeks. We continue to expect the full year gross margin to be similar to the previous financial year. Moving on to inventory, which I know is something many of you are keen to get an update on. Firstly, as we mentioned at our full year results, the higher inventory position in North America at the end of January unwound through the first quarter and has remained at a level we are comfortable with since then, considering where we are in the year and the phasing of our ongoing store opening programs across the region. This has helped -- sorry, this has been helped by the strong like-for-like and organic sales growth achieved in the region. Similarly for the group, inventory levels are under control. We are really pleased to complete the acquisition of Hibbett just over a week before the period end. As a result of this timing, there will be a very small contribution to sales and profit in the first half, and Hibbett won't contribute to like-for-like or organic sales for 12 months from acquisition. Hibbett adds material scale and presence in the world's largest sportswear market and fits neatly with our existing community brands in North America, filling a geographical gap in Southeast and U.S.A. Hibbett will also bring a strong platform to our continued JD rollout across the U.S. through its efficient supply chain and a strong back office. The acquisition took our total store count at the end of the period to just over 4,500. We will update more on the Hibbett acquisition at our first half results and over the coming months. Now turning to our thoughts on the rest of the financial year. The global macro environment remains volatile, and so we continue to be cautious on our outlook for the rest of the year. Notwithstanding this, based on our first half trading and allowing for an anticipated GBP 15 million headwind at current exchange rates due to a stronger GBP. A reminder that the majority of our business is outside the U.K., we are maintaining our guidance range of profit before tax and adjusting items of GBP 955 million to GBP 1,035 million on a pre-Hibbett basis. I've previously said, given the environment and at this early stage in the year in terms of full year revenue, we expect to be in the bottom half of the range. The currency headwinds reinforce this view. Finally, if you haven't already seen, we put some slides onto our website, giving you some additional and updated financial information to help you in terms of your modeling and understanding of the company following our change in segmentation and our move to quarterly reporting. We hope you find it useful. We'll be happy to deal with any questions you have on this additional information outside this call over the next couple of weeks, and then we will share with you the last two years, first, second half splits on the same basis as you're reporting going forward, so you can model your estimates for our first half ahead of the results in early October. In summary, this period, we're really on track trading-wise, with positive like-for-like sales and a strong 8.3% growth in organic sales. This reflects the strength and agility of our multi-brand strategy. We've maintained a close focus on operational execution across ranging, stock levels and margins. And we have continued to make progress on our strategy. We've continued with our store expansion program, opening 85 new JD stores in H1. And we're also pleased to have completed the acquisition of Hibbett, adding material scale and presence to our U.S. operations, and we'll be in a position to share more at our interims. That's it for me as an introduction. I hope you found this useful, and now I'll hand back to the moderator for any questions that you may have.

[Operator Instructions] Your first question comes from the line of Joseph McNamara from Citi.

The first is on North America like-for-like, as you said, very strong in Q2 at 6% and particularly in [indiscernible] given the market backdrop. I guess the question is, do you think you can sustain this level during the second half? That's question one. And question two, I guess you highlight the importance of multi-brand and other times during the statement. Are there any specific brands to call out that are driving, I guess, the pickup in performance. I would suspect maybe Adidas is performing well, but are there any other call out, I guess, within that, please?

Yes. So I think two things. On the second question, we are multi-brand, but we are not commenting on brands. So let's keep that aside. And -- but we are seeing a lot of good growth coming from a lot of brands, a lot of innovation coming. So I think it's not only one brand, and it's really a multi-brand. That's the part of our model. And I think the other thing is the agility and something that I will spend a little bit of time on this question because I think people underestimate how is the fact that we are global, give us a competitive advantage, and it's not reflected in our multiple. When we're talking about Adidas, two years ago, in September, I was visiting a store in U.S. and there was no [ Samba ], and at that time, it was just early days in Europe. And we -- and the team said to me, this would never work in the U.S. because it's a fin store, doesn't -- really there is no appeal from the U.S. consumer. I said, well, we know what we're talking about. Let's push for it. And we were -- and today they are #1 shoe for women in the U.S. So you see how much [ effect ] that we are global. It gives us the ability to get the first order, to get the first allocation, to get the biggest allocation, to get an exclusivity in Australia because no one else was thinking about this will be a success. So that is the global model, where we leverage things that we learn from every part of the world, and we implement more quickly and with the bigger scale for the brand. And that is something which should be reflected in our -- we are the only one to do that and should be reflected in our multiple. That's a question around the multi-brand. The first question on U.S. I think for the last two years, we keep having this question around the U.S. consumer and is it going, and we keep reporting double-digit growth for the last -- quarter by quarter. So I think that it has been quite consistent in terms of performance. I think our comparative is getting easier for the last quarter. I think the comparative for the next quarter is almost the same. So I think we have -- so I think we are gaining share in U.S., as you know, and we will continue to gain share. But I think we feel quite -- we feel that we are in a good path and we are in line with our expectation of the U.S. market.

The next question is from the line of William Woods from Bernstein.

First one is just on your kind of caution on the consumer outlook into H2. I suppose, are you seeing any early trends of consumer behavior turning that give you any kind of optimism on a recovery? And then the second one is obviously just building on the previous question. On Nike, are you seeing any improvements driven by new products, changing ranges and newness in particularly some of the ranges like Pegasus and Air Force 1 and things like that? Are you seeing any newness coming through that's driving an improvement there?

No, I think we are not saying. I think we continue to see the same thing. I think there is a strong appetite from the consumer around sneaker, around athletic leisure apparel. I think at the same moment, they want newness. They want good products. They want a good price. So I think there is nothing that has changed. And I think we continue to see the same thing. So nothing really new. I think the key question is around promotional activity from the competitor and the brand. I think that we have not seen -- we've seen something which is stable compared to last year, so nothing better or worse. There have been a lot of talk around getting to a better position for the second half. That's not -- we are planning on the same level of promotion activity than last year. We'll see what happened. Concerning Nike, I think as we said before, Nike -- we are not commenting on individual brand, but Nike will be fine. I think that they are doing the right thing. They are moving in the right direction. It's just the time to get that in the market, and that's where we believe they are on the right path.

Your next question is from the line of Richard Chamberlain from RBC.

Three for me, please, if that's okay. I just noticed in the trading update this morning, just sales in the other segment line fell 6% or so in Q2. I just wondered if you can just talk through the reasons for that. Second one is on Hibbett. What do you think might be the financing impact of that in the second half to P&L and cash flow? And then I guess another one for Dominic. Just going back to the annual report, there's quite a few references to sort of manual interventions and adjustments that have had to be made in the past in terms of revenue recording and accounting and so on. I just wondered if you can touch on sort of how far through that journey now you are in terms of sort of automation and beefing up the finance team and controls and so on, that would be helpful.

Richard, thank you. I think you've covered my whole job in a day given the various questions you've asked. So look, on the other sales, it is really businesses that don't fall to other segments. It is immaterial in terms of revenue. You'll see that in the first half. It's mainly one small online business. So I wouldn't pay too much attention to that. It's not going to have any impact on the group results. Hibbett, first half, I'll update on that when we get to the first half results. I think it's better to give you both sides of the equation, if you like, rather than just the interest side. We're working our way through the complexities of acquisition accounting to make sure we get it right under an IFRS piece for us relative to the past. And then on the controls piece. Look, it's a fair comment you made, and you -- I'm pleased to hear that you've read -- the annual report does get read. And we wanted to be clear about where we were in the journey. JD has rightly invested a lot in the front end of the business, and that's demonstrated in our proposition, the excellence of our retail business, perhaps less at the back office. And the business has grown significantly over the last five years. It' doubled in revenue, I'd say, almost quadrupled in complexity just because a lot of that has come through acquisitions. A lot of the work in finance has continued to be manual around things like group consolidation, some of the adjustments. The focus in the last year or two, even certainly before I joined, so it's not all down to me, has been around improving the manual controls, and we've continued to improve that since I've joined and into this new first half. And that's actually supported the fact that we're able to do a quarterly trading statement three weeks into the new quarter rather than waiting several weeks. So I think that's helped us improve that. In terms of automation, it doesn't always happen overnight, and we're on a program of investing in things like new consolidation systems, new lease systems, which will help us get even better control than we have today and also provide some efficiencies as well. So it's a journey which is sort of two to three years, but you don't need the systems to have the right controls and the focus is on getting controls right? The systems will bring efficiency.

Your next question comes from the line of Jonathan Pritchard from Peel Hunt.

Just on the U.S.A., the brand, how widespread is it where in areas that you aren't? I mean, do you see people sort of rather expecting you to arrive, waiting for you to arrive, celebrating your arrival? Or is it something that has been a sort of slower creep and people only really know about when you get there? And perhaps just tie in a little bit of a comment on potential flagships and building the brand on that basis.

Thank you, Jonathan. I think that JD's main area is mall and mall I think that just what the consumer is doing, they come to the malls, they see the different retailer. As you know, there's quite a lot of competition in the sneaker world in the U.S. And they go to the best proposition in terms of the more modern the best execution, and we are doing a better job. That's as simple as that. I think the brand is far away from being built in authority and other stuff, we are still a long way to go. But when we show up as the consumer sees the difference compared to a very old and under-invest state in the U.S., I have to say that if you take the last five years just before COVID, I think all U.S. retailers have invested online, didn't invest off-line. We are the only one to come, and we have this unfair competitive advantage. We come with new space, new merchandising, a much more modern way of looking at it, and that's what is winning. So we are winning without the authority of the brand. So that give us now even more leverage because now we're getting to more than 300 -- we're going to 300 stores. So we will be starting to invest more on the brand and all that stuff, but we are winning because we have the best proposition.

Your next question comes from the line of Alison Lygo from Deutsche Numis.

Three for me, please. First, just wondering if you could help us with expectations of the phasing of profit for this year and whether it's going to be different from the usual slightly weighted towards H2 [indiscernible]. Second is around the European consumer. Actually a lot of focus on the U.S., I'm just wondering if you're seeing anything in terms of consumer kind of behavior appetite to spend across Europe? And then the third, a little bit of a technical one, but just on your expectations for noncontrolling interest this year, there's obviously been a lot of moving parts in terms of the buy of ISRG, but with the majority of earnings growth coming from the U.S. and U.K. earnings declining, some help on your expectations for this year would be really helpful.

I will take the European consumer. And after that, I will let Dominic go answer two other questions. I think that we see Europe has been a little bit behind in terms of the trends around sneaker especially compared to U.S. per capita and U.S. is double the one in Europe and compared to -- and U.K. is already in between. And we see this consumer catching up and especially in south of Europe, we see a huge appetite and a huge move to sneaker and to athletic leisure. And I think we'll benefit from that. So we see big growth coming from the south of Europe, and we see a very healthy market there. So I think that -- yes, you're right, we get a lot of question on U.S., but the reality is that the European customer is even more -- I would say, the trend that is sustaining the growth of our market is bigger in Europe than it is in the U.S. U.S. is already a very mature market in term of sneaker and athletic leisure. Europe is a growing market and with a growing appetite around our product. And I think we fulfill this appetite very well and growing very fast. That's why you see our numbers, which are quite good in Europe.

And Alison, just to pick up on your other two questions. In terms of phasing, no, we don't see anything materially different from normal. We typically generate around 60% of our profits in the second half, clearly skewed towards Q4. There's no particular reason why that would be materially different this year. And on the [ NCI ] you're right, that is evolving. We bought out the ISRG minority and MIG minorities last year. So the only material noncontrolling interest left in the group is the 20% noncontrolling interest in Genesis, which is our North American business. Mark will be able to follow up on the details of that with you. But we'll provide an update on that because we can overlay the Hibbett impact on that when we get to the half year results.

And your next question comes from the line of [ Nick Baker from BNPPE ].

A couple from me. Firstly, you've now completed the Hibbett acquisition. It's great news, obviously, and you've commented on that. Do you have any further plans or further insights that you can share about what you're planning to do with that particular brand going forward? Has anything changed? That's my first question. And then my second is a shorter one. Are you able to provide any update on the Courir acquisition?

[ Hibbett ] is what we said at the time of the acquisition. So I can repeat that is -- our strategy is very clear. We believe that there is a strong community market in the U.S., partly explained by the per capita and where you have the destination, which is JD and this is a major investment that we are making in the U.S., which is developing JD as a global brand, a national brand as a destination. And there is -- and this is for [ A and B ] mall on top street location. And you have a more community, more closer to the consumer offer, which is your convenient sports fashion retailer, which is what we do very successfully with Shoe Palace on the West Coast, very successfully in East Coast with DTLR. And we didn't have something in the middle in the Southeast part of the country, and Hibbett is completely filling this geographical gap and help us to cover the full market with a strong destination brand, which is JD and a convenience offer, which is Shoe Palace, Hibbett, City Gear and DTLR and this really form part of our strategy, and that is our strategy for the U.S. So nothing will change on this one. On Courir, it's a choice of doing an acquisition in Europe and going through the process. We are at the end of this process. We are talking about remedies with the commission and trying to find a way forward in order to close the deal for the end of this year. So that's where we are in Courir.

Your next question comes from the line of Anubhav Malhotra from Panmure Liberum.

Just one question from me. On the U.K. market, you had previously talked about that you have maintained promotional discipline and not participated much in the promotional environment in the U.K. But you're calling out today in the press release that this apparel and online promotional environment is impacting the gross margin in the U.K. market. So just wanted to understand if there has been any change in the stance and if that has contributed at all to the like-for-like improvement in the second quarter in the U.K.

Yes. I think what happened in the U.K. that as other retailers mentioned and as you can see if you look at outside, it has been a late summer, and late summer is never good for apparel because you sell your short and T-shirt when sales happen. So that's what it is. So it's not about we continue to keep our discipline, and we will continue to be disciplined, but there is some element that forces you to be on the same rhythm as a market and you cannot change the weather. So that has been the reason why we mentioned it. It's really around online and apparel, where we had a late summer or almost no summer, and that is never good for your margin.

[Operator Instructions] Your next question comes from the line of Richard Taylor from Barclays.

Just one question, please. I saw some comments in some of the trade press about your distribution center in Derby and restructuring. I realize it's potentially sensitive if there are redundancies, but can you give us an update as to what's going on there, please? And the supply chain in the U.K.

So as you know, we have a strong supply chain in the U.K. with two warehouses, Kingsway, which are our historical warehouses and Derby, which has been the warehouse we built for e-commerce. We are in the process of consultation. So I cannot give you the conclusion of that, but we are looking at the best way to serve our customers in the U.K. and to adapt to a situation where now the online market is not growing. In fact, it's going down and that the consumer is looking for more and more for an omnichannel proposition. So we need to take this into consideration in terms of the way we build the best infrastructure to sell our customer at the best price, and that's what we are doing with this consultation.

Your next question comes from the line of Liv Townsend from JPMorgan.

I think you said in your prepared remarks that you've seen a bit more price discipline in recent weeks. I was just wondering if you could elaborate on this. Is this global? Is this all brand? Or is this just related to apparel and the weather? And then also on pricing at Q4, you said that pricing, particularly on some apparel items, have gone too far with freight costs high at the moment. I'm just wondering if you're seeing anything in terms of higher pricing coming through from the brands on items for next year or late this year? And just what you think this might mean for the consumer if that happens?

Thanks, Liv. I'll deal with the first question, and Regis will pick up the second one. Yes, on the first, I think probably is more a reflection of coming out of sales season across all of our markets. It tends to be through different places in different countries, and we're sort of hitting into back-to-school. Again, it sort of phases through our markets in different areas. So I think that the comment there probably reflects that sort of change of season that we're acting in. I think we need to go through the whole quarter though to see how things play out and we'll update you on that when we get to our table.

Concerning the last quarter, I think we see no inflation this year. So it's a very -- so I think that -- and freight cost has been up last year and down and up and down. So it's -- there is -- it depends where you take the comparison. So I think that we are seeing -- I think that the inflation is over. And I think that everyone is looking at creating newness and giving the customers the best value for money. So I don't think that we'll see any inflation in the last quarter. What some of our competitors are saying that they will be less promotional in Q4. Some of the brands are saying that, that is something where we have not planned on that. We have planned on the same level of promotions as last year. It is perhaps an opportunity. But I think it's very early and it's too early. For the moment, we have not seen something changing on that promotional environment.

Maybe if I could just ask a quick follow-up on the U.S. about back-to-school. We've heard from some retailers that, that started pretty well. I'm wondering if you are able to give any color around that?

I think we will not comment, but we will stay the same.

We have a follow-up question from Joseph McNamara from Citi.

Just one on the store count number, please. If I understand right, you added 85 JD brand stores since the start of the year and the kind of group ex-Hibbett stores only increased by 10. Could you just explain where the kind of closure disposals occurred during the period? Was it non-JD Europe again?

Yes. We'll provide a detailed reconciliation of the first half, but we have been in the process of closing some stores, some in Eastern Europe, some elsewhere and there are some relocations. So it's a combination of factors, Joseph. So we'll update on the specifics at the first half results.

This concludes our Q&A session for today. I'd like to turn the call back over to Dominic for closing remarks.

Thank you very much. Well, thank you all for your questions, and thank you for joining. Just to wrap up, for the second quarter, we've seen strong trading performance, positive like-for-likes in both Q2 and Q1, up 2.4% in the quarter and 0.7% for the half. Strong Q2 organic sales growth, up 8.3%. And from the information we see, we're outperforming the sector. And we're remaining with our profit guidance for the -- profit guidance range for the year despite currency headwinds. And I think as I said in my opening remarks, I think those currency headwinds, just a reminder to everyone that we are a business that's majority outside the U.K. now. I think our trading reflects our operational excellence as we've talked about the strength and agility of our multi-brand business model and the ongoing retail excellence that JD is well known for and we've continued to manage all of which leads to us continuing to manage our margin and our stock well. And we continue with our strategy. We opened 85 new JD stores, and we've completed the acquisition of Hibbett. So that concludes an update on the Q2 trading. We'll be speaking to you again at the beginning of October with our first half results. I look forward to seeing you all then. Thank you very much.

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.