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

Good morning, everyone. All right. So I'm pleased to be here today to talk about our interim results to August '24. I think just a few opening remarks from me, really. I think the results show the resilience of the business actually that's emerging now and highlight the strengths that we've -- Régis and the team have started to build into the business. It's not been an easy half 1. We had tough comps. We had our legendary U.K. summer, and I know retailers are not meant to talk about weather, but then it does impact things like fashion and apparel sales. And of course, Nike's well-reported sort of stumble hasn't -- has created a bit of a headwind as well. So I suppose, after a bit of a painful reset in January, despite all those headwinds, we've delivered good results and a good half 1. I think over the 2 years that we've been here, the business has become much more focused. We've exited all the fashion businesses and so on and so forth. But we still retain a nice spread. And I think that's evident in these numbers here, if you like. If the U.K. weather's terrible, we've got the U.S. and Europe. If Nike is a little bit off form, and we have New Balance and Adidas and so on. So it's a good business. I think you see today a resilient business and well set for the future. And I'd like to thank Régis and Dominic. There's a huge amount of hard work gone into all these numbers and all of the JD team. And onwards and upwards for the second half and the all-important Christmas period, of course. Anyway, the schedule today is Dominic is going to take you through the financial results now. And I think there's a slide for this, but I don't know why it's gone. And then Régis will talk you through after that. So over to you, Dominic. Thank you very much.

It's okay. Yes. All good. Thanks. Good morning, everyone, and thanks for attending today. And also welcome to those who are watching online live or watching later on the replay. It's almost 12 months to the day since I joined JD, and it's been a busy but productive year. I laid out some of the areas of focus we have in financing JD at the full year results. And while there's still lots to do, the team will continue to make good progress in building the finance and control environment we need in JD. The business, meanwhile, continues to demonstrate the strength and agility of its multi-brand model and operational excellence with a strong set of results in this first half in what continues to be a volatile market. I'll start with an overview of the results, and then I'll hand over to Régis to go into more detail on the progress we've been making and how our strategy and business model position us well to capture profitable market share in the structural growth market. So before we get into the details of the first half results, let me start with a few brief headlines to set the scene. Overall, our first half performance is in line with our expectations, with revenues breaking the GBP 5 billion milestone for the first time. We've delivered this in a volatile market conditions, and as I said, it's a clear testament to the strength and agility of our multi-brand model. From a trading perspective, this reflected strong performances in North America and Europe, which delivered double-digit organic sales growth with 9% organic sales growth overall for the JD brand. This revenue growth was also delivered while maintaining operating margin in line with last year before the benefit of the Hibbett acquisition, reflecting our focus on cost control and operational efficiencies, offsetting the ongoing investment in the future growth of the business and the infrastructure we need to support that growth. Including Hibbett, operating margin was up 20 basis points. From a cash flow perspective, this was a pretty typical first half. We're a highly cash-generative business and delivered operating cash flow of close to GBP 300 million in the first half. And notwithstanding our increased CapEx and the acquisition of Hibbett, we maintain a strong balance sheet, with net cash before lease liabilities of GBP 40 million at the period end. And lastly, we are maintaining our FY '25 guidance range. I'll come back to that later in the presentation. So turning to the P&L. Reported revenue was up 5.2% and 6.8% on a constant currency basis. This includes GBP 61 million from the 10 days of contribution from the Hibbett acquisition, which completed just before the period end. Underlying revenue trends were positive, excluding the impact of acquisitions and disposals. Like-for-like sales growth was 0.7%, and organic sales growth was 6.4%, both showing an improving trend from Q1, where we were trading against strong comparatives. Our gross margin was 48.2%, 20 basis points down on the prior period. Excluding Hibbett, which has a slightly lower gross margin rate, it was 48.3% and just 10 basis points down. Given continued promotional activity in the market, this is a solid result. The decline was driven by apparel, mainly through the online channel and particularly in the U.K. where the weight of apparel is much higher. Operating profit before tax and adjusting items was up 6.7% on a reported basis. On a constant currency basis, it was up 8.3% to GBP 451 million. This included a GBP 13 million contribution from the Hibbett acquisition. Hibbett's revenue and profit performance in the period was ahead of the normal run rate as the U.S. back-to-school was slightly earlier this year and boosted by sales tax incentives in its main regions. With net financial interest up GBP 20 million year-on-year due to increased lease interest as we grow our store portfolio and renew existing leases, profit before tax and adjusting items was up 2% to GBP 406 million. Statutory profit before tax was down 64%, and this was due to increased adjusting items year-on-year. These are predominantly noncash. The 2 main contributors to the GBP 280 million of adjusting items were an update to the Genesis put and call option valuation following the acquisition of Hibbett, Genesis being the vehicle through which we own our North American business; and an asset impairment relating to the closure of the Derby distribution center. Adjusted EPS was up 4.5%, ahead of growth in adjusted PBT, and reflects the earnings-enhancing benefits of buying out noncontrolling interests across the group, with the 49% in ISRG in Spain and the 40% in MIG in Eastern Europe bought out in the second half last year. And finally, we're proposing an interim dividend of 0.33p. That's up 10%, reflecting the cash-generative nature of the group and our commitment to enhancing returns to shareholders while recognizing the future cash outlays associated with our ongoing strategic investment program. So actually, there's a lot quite -- a lot going on in our results here. But to sum it up, the key takeaways are good growth trends, particularly in the U.S. and Europe; a disciplined approach in a promotional market; and ongoing cost control offsetting our investment in the foundations for future growth. So now let's turn to the revenue bridge from H1 last year to this year. Starting with the more mechanical adjustments. We started to see some material movement in exchange rates over the last few months. And with 70% of our business now outside the U.K., this inevitably has an impact on our reported numbers. So restating H1 '24 revenue for the FX translation effect results in a GBP 70 million or 1.5% drag. We then adjust for the sales from the disposals we made during H1 '24 and the impact of the FY '24 53rd week to align like-for-like weeks. The first half this year includes an additional week in the summer and last year including an additional week in January. This rebases us to GBP 4.7 billion versus the actual H1 '24 of GBP 4.8 billion. So from that base, with like-for-like growth of 0.7% and the combination of new space in the period and the annualization of new space from last year, we achieved organic growth of GBP 298 million or 6.4%. Finally, we add in a GBP 63 million M&A revenue contribution made up of GBP 61 million from Hibbett in the 10 days of the period that we owned it and a small contribution from the 4 Simply Gyms we acquired in the period. All in all, and you get to just over GBP 5 billion of revenue, a record first half for JD. It's worth, at this point, stepping back and looking at the business mix. We're a diversified and well-balanced group, and this is something Régis will come back to shortly from a strategic perspective. What you can see from the results is that by region, North America is now our largest market at 35% of revenues. And on an administrative pro forma basis, it will represent 40% based on combining Hibbett's FY '24 revenue and our FY '24 revenue. As the largest market globally, we see lots of scope for profitable expansion in North America. Alongside North America, we saw strong growth in Europe, and this has further balanced our geographic mix. Adding in Asia Pacific, as I mentioned earlier, 70% of our business is now outside the U.K. This compares to just 20% 10 years ago. With the majority of our capital expenditure and our prospective acquisitions focused on the growth regions, we will see overseas share revenue and profit continuing to grow. Turning to channel. We view ourselves very much as an omnichannel business. It's our job to make it as easy as possible for customers to choose how and where they want to buy. And so we are channel agnostic. That said, you can see the impact of 2 things on the progression of our online share of sales. The first is our store rollout program, which will see an increase in sales from stores, with omnichannel online revenue growth following as the stores embed in their catchment areas. And secondly, we are growing revenue faster in regions with lower online penetration such as North America and Europe. So that will weigh on the share of online sales and the overall mix in the near term. And finally, by category, we saw growth in both footwear and apparel but with relatively stronger growth in footwear. Footwear grew to 60% of sales, with apparel now at 30%. It also reflects stronger sales growth in regions where apparel penetration is lower, such as North America. Again, like online, this factor will impact the overall share of apparel in our sales in the short to medium term. From an operational and management perspective, our prior segmentation is by fascia. So let's take a quick look at each of these in turn. We provided more detail by segment in the appendix. JD continues to be the engine of our group, representing 71% of both our revenue and profit before tax and adjusting items in the first half. Reported revenue grew by 7%, and the gross margin at 49.5% was flat year-on-year. We did see profit before tax and adjusting items down 2%, with JD including the bulk of the ongoing investment in growth and infrastructure. Our second segment, Complementary Concepts, saw revenue grow 12%, with profit before tax and adjusting items up 16%. This reflects good performances from our existing community fascias, Shoe Palace and DTLR, and the contribution from Hibbett. Like-for-like growth was 1.6%, and organic growth was 1.5%. Organic sales in the MIG complementary fascias in Eastern Europe were slightly down as we started converting stores to JD and rationalizing the brands in the market. Sporting Goods and Outdoors saw revenue drop 5%, but profit before tax and adjusting items grew 16%, reflecting the closure of SUR in the prior period and the disposal of Bodytone in Spain earlier this year. Both were loss-making businesses. Like-for-like sales were up 0.6%, with organic growth of 1.6%. Now let's take a look at our group performance by region. Starting with the U.K., which is the JD U.K. business plus Outdoors. Revenue was down 4%, and operating profit was down 12% in a tough trading environment. We remain promotional, partly due to tough apparel season, and while I hate to blame the weather, a cold and wet Easter resulted in a late spring/summer season coinciding with the summer sale period. And as I just mentioned, the U.K. is where we see the majority of our investment -- infrastructure investments, sorry. Europe saw revenues up 6%. Operating profit was up 21%, benefiting from operating leverage as we grow scale in the region and begin to see the early benefits of our European supply chain investments as well as reduced losses from the closure of SUR and the sale of Bodytone. North America is now our largest market by both revenue profit in the period. Revenue grew by 16%, and our growing scale converted that operating profit to operating profit growth of 26%. While there was a small benefit from Hibbett, its contribution was only GBP 61 million or 4 percentage points to revenue and GBP 13 million or 6 percentage points to operating profit. In absolute terms, Asia Pacific revenue dropped 4%, with profit down 19%, reflecting the South Korea exit last year, the disposal of GymNation and the investment costs in the business ahead of the benefits that we'll get from those as we grow our presence in the region. So with the P&L covered, let's move on to cash flow. JD remains a strongly cash-generative business, with operating cash flow of GBP 282 million in H1 despite the seasonal stock build following the FY '24 peak season. Net cash flow before financing was slightly negative reflecting our increased capital expenditure. We saw a GBP 71 million movement in our cash balances from M&A, primarily reflecting our acquisition of Hibbett, with a new acquisition debt facility funding a large proportion of the acquisition cost. With GBP 31 million in dividend in the period, the overall cash outflow was GBP 222 million. And then turning to our balance sheet. We finished the period with net cash of GBP 40 million in line with our expectations. As explained on the previous slide, we saw a GBP 222 million cash outflow, reducing our cash and cash equivalents balance to GBP 880 million. With the incremental debt incurred as a result of the Hibbett acquisition, bank loans increased by GBP 769 million, resulting in period end bank loans of GBP 839 million. This gives us GBP 40 million net cash before lease liabilities. With lease liabilities increasing by GBP 397 due to our store rollout program and the acquisition of Hibbett, we finished the period with IFRS 16 net debt including lease liabilities of GBP 2.8 billion. Notwithstanding the acquisition of Hibbett, we maintain a strong balance sheet. Before lease liabilities, we are unlevered with a net cash position. Just drilling into the balance sheet a little more. Let's take a quick look at our inventory position at the period end. Excluding Hibbett, inventory was GBP 1.7 billion, GBP 111 million up on the prior period and represents around 16% of our last 12-month sales, broadly in line with the prior period. Hibbett added GBP 278 million. The U.K. saw lower inventory, reflecting slightly lower sales, while Europe and North America saw inventory increase against where we were 12 months ago as we continue to ensure we have the stock in place to fulfill our growth plans and store rollouts across both JD and other businesses. Overall, we are comfortable with our stock position going into peak. And turning to CapEx. Period-on-period, CapEx was up GBP 42 million to GBP 251 million, reflecting a slightly faster start to our rollout program this year versus the prior period, particularly in North America. You may remember that the Capital Markets Day, launching a new strategy was at the start of H1 last year. Of the total CapEx, 2/3 was investment in our store rollout program. Within the property CapEx, all of the increase was driven by North America, with Europe in line and the U.K. marginally down on the prior period. We're highly disciplined with regards to our store investment process. There is a detailed data-driven planning approach, which includes analysis of the catchment area, the competition, the exact fit out and a clear view on which fascias and cost model are right for which locations, with a continual test-and-learn approach to inform future investments. All new store approvals, relocations and extensions across the whole group come to a central property Board, which Régis and I attend. And apart from a few flagship stores, we apply a strict 3-year payback hurdle. And just touching on our supply chain, CapEx reduced to GBP 12 million in period-on-period as we work through our group-wide program to improve supply chain capacity and efficiency. Régis will update you more on this later. The third major part of our cash outflow is on M&A. As you know, in the period, we completed the acquisition of Hibbett, adding scale and capability to JD North America. We plan to do a deep dive at a Capital Markets Day on our North American business in the spring. So for now, I'll bring you up to speed on the high-level current year financials. First off, the 10 days period that we owned Hibbett is not indicative of the full year result. As mentioned earlier, this stub period coincided with a slightly earlier peak back-to-school season, with more falling into H1 than usual and was very strong at Hibbett this year due partly to sales tax incentives across its key regions. Therefore, don't extrapolate the H1 contribution for the rest of the year. So taking that H1-H2 phasing into account, we anticipate Hibbett contributing around GBP 25 million of profit before tax and adjusting items in this year. There are 3 drivers for this. Firstly, as anticipated, and you will have seen from their published results before our acquisition, current year trends are slightly softer than FY '24. Secondly, the esoteric world of acquisition accounting, including the move of U.S. GAAP to IFRS, has impacted negatively on Hibbett's profitability within the group. These 2 points together point to around GBP 50 million contribution. And thirdly then, there is GBP 25 million incremental interest associated with the debt we have taken on to acquire Hibbett, bringing us to GBP 25 million overall. And now on to my last slide before we show a video on our U.S. business, and then Régis will take you through our strategic progress. We're maintaining our FY '25 PBT before adjusting items guidance of GBP 955 million to GBP 1.035 billion. This reflects a 1% to 4% like-for-like revenue growth range. But consistent with what I have previously indicated, we continue to expect to be in the lower end of this range. The market remains volatile, and we still have our important peak season ahead of us. We've highlighted 2 additional factors. The first is currency and builds on the GBP 15 million FX translation headwind we highlighted when we gave our Q2 trading statement, of which GBP 6 million was incurred in the first -- in the reported H1 result. The pound has strengthened since then, so we have updated this impact based on the current U.S. dollar and euro rates, which adds an additional GBP 10 million, giving you the GBP 25 million in the guidance update. We provided detail in the appendix. But as a rule of thumb, every USD 0.01 equals around GBP 1.7 million change and EUR 0.01 equals around a GBP 1 million change to our H2 profit. And then we add Hibbett, which as I just mentioned, we see adding around GBP 25 million in the current year. So to wrap up my section. Overall, we're pleased with our performance in H1 and what was a volatile market, and we are maintaining guidance, all a reflection of the strength of our multi-brand model and our operational focus. And with that, and before I pass you over to Régis to talk you through progress against our strategy in the period, we'd like to share a short video highlighting our U.S. business with you. [Presentation]

A JD presentation will not be a JD presentation without a video with loud music. So I hope you enjoyed it, and let's go to the strategy update with no loud music but a strong French accent. Don't know what is more disturbing. You will tell me after. So good morning, everyone, and thank you, Dominic, for this detailed presentation of our first half results. It's a record first half results with positive like-for-like, with an improving trend during the first half, an organic growth of plus 6%, with double-digit growth in North America and Europe and a profit before tax and adjusted item at plus 3.4% in constant currency. In the first half, we completed the acquisition of Hibbett, giving us a platform for growth in the world's largest sportswear market and the fastest-growing economy in the region we operate and now our first market. With an annual turnover around GBP 11.7 billion, equivalent to more than USD 15 billion and 4,500 stores in the world, JD Group lead the global stores fashion retail industry. We have positioned ourselves for ambitious growth with our triple double: double-digit revenue growth, double-digit operating margin and double-digit market share in key region. Those ambitious objectives are not new, but they are more relevant than ever as we continue to drive forward. JD's solid foundation is underpinned by several key factors. We are a global leader in one of the fastest-growing sector, athletic leisure, with this market expected to grow by more than 5% annually over the next 5 years. Our multi-brand model gives us the flexibility and resilience to serve as a preferred route to market for our brand partner, ensuring that we are the go-to destination for the latest in sports and fashion. Most importantly, we have built strong connection with our consumer who love and trust the JD brand. This foundation will support us as we execute on our growth plan in the months and years ahead. At the heart of our success is our continued focus on our 4 strategic pillars that define JD Group as a leading sports fashion powerhouse. JD Brand First is our commitment to keeping JD at the forefront of premium sports fashion, ensuring that we remain the top choice for consumers around the globe and our first priority as a group. JD Complementary Concepts is about targeting a wider and diverse customer, broadening our reach, deepening our offering and contributing to our scale and market presence. JD Beyond Physical Retail is our investment in infrastructure, governance, digital transformation to deliver growth and to give our customer a seamless experience across all channel. Last but most important, JD people, JD partner, JD community reflect our commitment to our people, our partner and the community in which we operate. They are critical and vital to drive our long-term success. Our progress across those 4 pillars give us full confidence that we are on the right path to sustainable and profitable growth. Over the last 5 years, we have more than doubled the size of the group. We have improved our operating margin from 7.7% to 9.1%, and we have also moved from being U.K. centric to become a truly global group. Looking at the group in 2019 and today, including Hibbett's 2024 published number, our revenue increased from GBP 4.7 billion to GBP 11.7 billion, driven by both organic growth and strategic acquisition. Over this 5 years period, U.K. grew by 50%. Europe expanded nearly threefold. And in North America, with the inclusion of pro forma revenue from Hibbett, we have seen a growth of nearly 5x. This huge growth reflect our strategic focus on investing in market with room for profitable and sustainable growth. The acquisition of Hibbett adds over 1,100 stores across the largest sportswear market in the world. As a result, North America will account for more than 40% of our total revenue. This global expansion demonstrates our commitment to invest in key region, key market to build a more diverse, resilient revenue base and to increase our profitability. Those impressive figure -- growth figure are achieved through 3 type of growth: like-for-like growth, organic growth with new store and store conversion and inorganic growth through acquisition. While we continue to deliver positive like-for-like, our performance is influenced by the broader market condition, which has been volatile. Nonetheless, we are confident in our ability to navigate these external challenges and sustain our growth trajectory. Our focus on organic growth is unchanged, and our ambition to open around 200 JD store per year is well on track. In the first half of this year alone, we have opened 102 new JD stores and 32 new complementary stores, and we are on track towards our total doors ambition for the year. The conversion of Finish Line store into JD continue to be a success, with an additional 13 stores converted during the first half of the year. We are looking at an accelerated program of conversion to fully leverage the potential of JD brand in the U.S. For the rest of the world, it's mostly country where we will operate through franchisee with an asset-light model. We have signed Middle East, South Africa, Indonesia and Philippines, and we should see the number of store opening accelerating in the coming years. By the end of this financial year, we expect to hit a major milestone with over 2,000 JD store opened globally. As mentioned by Dominic, while growth is important, we maintain a disciplined approach to how we invest in new store with a 3 years payback hurdle. When it comes to acquisition, our ability to profitably grow acquired fascia has been demonstrated time and time again. As an example, since acquiring DTLR in 2021, we have increased both its revenue and EBITDA by approximately 40%. Similarly, with Shoe Palace acquired in 2020, we have achieved a 50% increase in revenue and more than double EBITDA compared to the last full year before acquisition. This track record underscore our success in integrating and growing acquired fascia by applying 3 things: JD Group operational excellence, developing omnichannel and leveraging a truly agile multi-brand customer proposition. We look forward to continue this momentum with Hibbett. We will share further details about our plan for Hibbett at an upcoming Capital Market Day in spring. And if you look at our full story in U.S., you can see easily how successful we have been. Back in 2019, we acquired Finish Line at that time with a revenue of GBP 1 billion and losing money. By 2023, our sales in the U.S. reached GBP 3.1 billion, an increase of more than GBP 1 billion if I compare to the addition of the historical sales of the acquisition of the 3 businesses. Similarly, by 2023, our EBITDA has grown to over GBP 456 million versus a starting point of around GBP 80 million. This is 6x more. These achievements reflects our ability to scale rapidly while expanding our presence and making, at the same time, JD, our #1 fascia across North America. Alongside this growth journey, we outperformed our peers across key metrics. We have expanded globally at a faster pace than most, and today, a significant portion of JD revenue, 50% more than the industry average, come from the international market. This global diversification provide JD with a competitive advantage over those who remain heavily reliant on one single market. JD revenue growth is more than double the industry average. Where many peers have struggled to maintain single-digit growth, we are consistently delivering strong double-digit growth, particularly in key region like North America and Europe. More important, JD store productivity is about 50% higher than competitor. Space productivity is the most important KPI in retail, and it means that we can secure the best location in the best mall and deliver superior returns. Our digital revenue share is higher than many others. Our omnichannel development, such as Click & Collect and ship from store, will further improve our customer experience but also our profitability. Those strong metrics make us the chosen route to market for our brand partners, increasing our agility of our multi-brand model. We understand that sustainable -- sustained growth is impossible without a solid infrastructure, the governance, the organization and the people to support it. This year, we have committed over GBP 60 million to our supply chain and logistics network. Those investment are critical in ensuring that we can meet the growing demand for our global business. We also have increased our spend in technology, cybersecurity, risk management and audit to improve operational resilience. Protecting customer data and our system from threat is a priority. And by reinforcing our tech stack, we are laying the foundation to support our future growth and digital ambition. Governance, transparency and control improvement remain top priority. We have moved to quarterly marketing reporting to give you greater transparency on our performance. And we continue the codification of internal processes and control across the group. And we are investing in our people to power our performance at all level, which includes some new key leadership appointments, including Mike Longo, as CEO of North America, alongside a new leader in supply chain and a new Chief Technology Officer. We have now a global operating model with 3 regions, North America, EMEA and APAC, and a team of leader representing the diversity and the scale of our business. For our colleagues, we have continued to invest in upskilling our people through training and development, with all retail manager receiving leadership training, covering 9 key models such as general leadership, emotional intelligence and customer service. I'm proud to say that 90% of our store manager have been promoted internally. We are working on a new and innovative way to connect our people across the globe to share information, knowledge, emotion, trends, fashion and have fun. Coming back to our supply chain. One of our key challenge is to follow the pace of our store expansion. So we are working hard to upgrade and modernize it across all the region. All our new warehouses are fully omnichannel and designed to fulfill B2C and B2B orders. In U.S., we don't have enough capacity in our existing warehouse to support our growth. We are opening a warehouse on the West Coast to serve Shoe Palace and JD growing presence in the West. The acquisition of Hibbett will give us more capacity and a strong distribution network. We are working on the optimization of our U.S. logistics, and we'll present back to you at the upcoming Capital Markets Day. Following Brexit, it is not longer -- it is no longer competitive to use our U.K. warehouse in Europe. Our new distribution center in Heerlen is critical to improve our margin as we scale across Europe. Heerlen is now up and running, with manual operation alongside our existing warehouses and with limited capacity. By 2025, we are looking to bring in automation and to stop gradually using our old facility in Europe. Then in 2026, we will start to use a facility for direct-to-consumer order with faster shipping time. The opening of Heerlen implies reduced volume for our U.K. supply chain. As a consequences, we have consolidated operation in Kingsway, our existing warehouse, and close the Derby DC, simplifying our network and reducing cost and stock. In Australia, we are moving out our existing facility to a new DC to improve delivery times, speed to market and better support our growing business. By upgrading our supply chain and transform to a full omnichannel one, we expect to achieve cost efficiency, faster fulfillment, better stock turn and scalability to support our future growth and to serve our customer better. We know that the winning customer proposition is the omnichannel one. The customer wants the best of the 2 worlds: the store and the web. And they want a seamless journey across the different channel. Our digital ecosystem need to provide them with a consistent and effortless experience. It is not about where they make their purchase. It's about ensuring that they can get the product they want when and where they want it. To enable this, we have been transforming our e-commerce platform. We already launched an enhanced platform in Thailand last week. And the next step is our journey to expanding this capacity to Italy before the rest of Europe and U.K. The JD STATUS loyalty program continued to expand rapidly. In the U.S., we have now 5.1 million active members while in Europe, the program is equally successful. In the U.K., we have seen 1.8 million app download, with 81% of user actively engaging. The average transaction value for loyalty member is 33% higher than nonmember, demonstrating the program effectiveness in driving customer spend. Beyond just encouraging repeat purchase, the program help us to collect valuable data, providing insight into our customer preference and behavior, enabling us to personalize the experience and improve long-term loyalty. Omnichannel functionality such as Click & Collect and ship from store are key driver of both better customer convenience and enhanced profitability. We are rolling out those feature across Europe, having successfully tried them in U.S., ensuring we meet customer expectation and improve our bottom line. As a conclusion, our performance, our strategy and our potential combined are a compelling value-creation opportunity. We operate in a structural growth market that benefit from the ongoing global shift towards more casual and active lifestyle. We are positioned as a leading player in key markets, U.S., Europe, U.K., with ample market share headroom. Our multi-brand model ensure resilience, provides strong store economics in both established and emerging market. We are focusing on delivering a customer-centric omnichannel proposition, supported by our JD STATUS loyalty program. Our robust financial position allow us to continue investing in infrastructure, in supply chain, in technology, in store, ensuring we can scale efficiently. This solid foundation, coupled with our high cash generation give us the flexibility to deliver a great return to our shareholders. So we have delivered a strong first half with positive like-for-like, with an improving trend during the first half, an organic growth of plus 6% and a profit before tax and adjusted item plus 3.4% in constant currency. This demonstrates the strength and agility of our multi-brand model. With the acquisition of Hibbett, we are growing our global presence, adding scale and opportunity in the largest sportswear market in the world. We are focusing on the operational excellence with margin cost control and good inventory management. Our balance sheet is strong. We are generating cash from operation to give us the ability to invest in organic growth and infrastructure. So now let's move to Q&A.

So we have some questions in the room. Of course, we've also got online today as well. So what we'll do is we'll start within the room, and then we'll perhaps take some questions online after we've done that. So with Jonathan then Kate, and then in the corner over there, and we'll come to you.

Jonathan Pritchard at Peel Hunt. Just a couple of North America, if I may. Badge flips, I wasn't sure the pace in the first half is quite as quick as I expected. So what's going on there? I assume the Finish Line brand will disappear. But how quickly -- how are you moving forward with badge flips? And then perhaps just another level of granularity on Hibbett, just what you'll bring to the party. Obviously, very attractive graph you put on there with DTLR and Shoe Palace. How are you going to achieve that with Hibbett? What are the things that it perhaps lacks that JD can add?

Yes. So on the badge flip in U.S., we are -- as you mentioned, I think we are looking at the plan for that. In 3 years' time, we will have moved all the store from Finish Line to JD. We are testing new model. For the time being, we have been taking the high-potential store in terms of sales and high sales. So we are now looking at stores which are smaller. So how we adjust the investment to make sure that we get the right return when we flip the badge. So we have done some very interesting and -- test around GBP 50,000, GBP 100,000 and GBP 150,000 CapEx to see what type of upside we can get. So that will continue to move. And I think in the coming 2 years, you will see all the store moving to JD. On Hibbett, I think that we see 2 things. The first thing is that our success with -- and you have seen the number with DTLR and Shoe Palace as I said, was 3 things. First, operational excellence, how we manage stock, how we manage the customer experience. We bring a lot of expertise in what we have done in terms of the quality of our process, the quality of the way we organize the stock room, we give the service to the consumer. So that's one we believe that there is some benefit for them to learn from what we have done. I think the second one, which is a big one, is that we are a truly multi-brand. And I think that being European, we tend to have more brands. And the U.S. retailer, especially the sportswear one, has been very much focused on Nike and -- only and more acting like a Nike distributor. We bring a much breadth of offer, and we bring this multi-brand, which is more resilient, especially in today's situation. So I think that's a key benefit, too. And I think that the last one, we will get the benefit of Hibbett's strong supply chain expertise, strong team in terms of our back office for the U.S. So there is -- it's a 2-way thing. So I think there is things that we will bring, and there is things that we will get. And I think that the first element of that, we had 1 week with the team to start to put the team together. And I'm very pleased about the way it works. It's the same culture. So Hibbett team has been in the industry for a long time. Our team has been in the industry for a long time. We speak the same language. And I think that it went well. And I think we have very complementary talent, and I think I'm looking forward for the value we can create in the U.S. by -- through this acquisition.

Kate?

Kate Calvert from Investec. Two questions for me. It looks like Nike's underperformance is going to remain a headwind for a while. Can you give some detail on how the business has had to pivot, say, in the first half to kind of fill that Nike sales shortfall in the States? And do you think you're in a good position for the second half? And in terms of the second question, could you talk through how the promotional environment changed in the first quarter versus the second quarter and, again, your sort of thoughts on the second half promotional environment in the States given Nike's comments last night?

Yes. I think that on Nike, we are more positive than you are. I think that we see some good things happening. I think that Elliott will bring energy in the business and focus on product and innovation and wholesale partners. So I think we're quite positive on that. I think that at the same moment, we are lucky. We are in an industry which is a growing industry. So consumer wants new product. And if they don't find it from Nike, they will find it from other brands. So I think our agility to move and agility to pick up trends and to be the first one to pick up those trends has been demonstrated time after time, and I think that we will continue to see that happening. So we see a huge trend around retro running. And that is New Balance, that is ASICS, it is Nike too with Vomero, so I think we see that. We have seen the Terrex trend with Adidas. So all of that give us a lot of headwind and, I think, will help us in the coming months. So I think we are not nervous about that. I think we manage that, and we have been managing that for a long time. But I feel more positive about Nike than what you -- the way you describe it. On promotion, I think that you remember certainly at the beginning of the year, a lot of competitor was saying that promotion will be less. I think we have not seen that. I think it's the same as last year. And we built our plan based on that, and we plan -- we built our second half based on that. So we have not seen reduced promotion. We have not seen increasing promotion. I think it stay as it was. And I think that there's still a lot of promotion out there and there's still a lot of people trying to buy, sell by doing promotions. So we feel that the way we have forecast was the right way to forecast.

And then Monique.

It's Monique Pollard here from Citigroup. A couple of questions from me. The first one was just on the gross margin. Obviously, underlying the gross margin down 10 basis points in the first half. But actually down 30 basis points in the second quarter, underlying ex Hibbett. Now you pointed out that, obviously, the weather and the late start to the summer season had an impact. But just wanted to understand if you could give us any comfort that a lot of the sequential deceleration in the gross margin was just the weather and, therefore, doesn't recur into the second half of the year given your guidance on the gross margin being broadly flat. And then the second question, it's just on the current trading. I know you're not giving current trading today because we've got the quarterly results. But whether you could at least comment on whether it's in line with expectations and you're comfortable with the current trading because I think there's some nervousness in the market, particularly given Nike results overnight, et cetera.

So I mean on the gross margin percentage, you're right. So Q1, we were flat. Q2, we were down about 30 basis points, excluding Hibbett. And that really did reflect, I think, a more volatile second quarter. The weaker gross margin in the second quarter was in the U.K. And as Andy has already said it, we don't like to blame the weather, but we're going to. Easter, early summer was pretty awful, and people weren't buying the summer ranges at that point. When we did sell them, it was during the sales period. So -- and I think everyone else is in the same position. So it was pretty promotional. So that did weigh on our margin in the second quarter. That's taken it down 10 basis points, excluding Hibbett for the first half. Look, I mean it's a volatile market. There are things like that are happening. But when we look forward, as Régis said, we still -- we see the promotional environment staying relatively similar. That's how we forecast. There will be some ups and downs. But overall, we're still comfortable with broadly flat year-on-year. And on the current trading, I think what I will say is we've reiterated our guidance for the year. The only impact is really around currency translation effect and adding in Hibbett.

Richard Chamberlain, RBC. Could I ask about the returns, sort of payback profile for flagship stores? I think you indicated earlier, it's -- you allow a little bit more slack versus the sort of the usual 3-year criteria. But I just wonder how they're panning out so far in the U.S. and also in the U.K. for flagship locations. And then the second one is, how are you getting on with the euro warehousing automation plans and the benefits to come there and, I guess, things like avoiding double duty and so on? And where are we on that sort of journey?

Shall I start? I mean I think the flagships are a handful of stores in 4,000. So we shouldn't let that sort of guide the overall position. Régis allows them to be less than 3 years payback. As CFO, I sit there with gritted teeth. But it's the right thing to do. And they're all slightly different. So if you take our flagship stores in the last 12 months, Champs-Élysées has got us a presence in the capital of Paris, huge footfall, huge brand awareness. So it's quite difficult to say what criteria we apply. There is -- there, you say it's sort of a marketing impact that we can take from those Times Square in New York, et cetera, et cetera. In cases, from an accounting perspective, do we have to impair them, no. So we're comfortable with the investment we're making, but they don't necessarily hit that 3-year payback.

I'm sure Champs-Élysées will do it, but that's a debate. But -- and on our warehouse in Heerlen, so what we have done is that it's open. We are using manual process and half of the space because the other space has been built with automation. So that means that we still use a little bit our U.K. warehouse, but it has been reduced, as mentioned by Dominic, so we have reduced a little bit the double cost and the tariff. But we are still using 2 other warehouse in Europe that will be closing when we will be fully automated. So -- but we have decided not to take any risk ahead of peak period because we could have pushed to get there, but that's a risk. So we just say we will postpone to begin of next year. So that means that we will have time to ramp up. Yes, it is extra cost, but at the same moment, I think that there is no more -- it's much safer to do that.

John Stevenson at Peel Hunt. A question on learning points really. It's been a really tough 18 months. Obviously, we talked about the weather, consumer, competitor, sort of supplier issues in terms of your brand partners. Would you change anything with hindsight in terms of how you come to market? And how does it make you think about peak this year in sort of view of how things have been over the last 18 months? And I guess the other side of that question would be, any areas that have been better or more resilient than you expected?

I think it has been great. I joined the business 2 years ago, and I really enjoy, and we have delivered some fantastic growth in the last 2 years. We've been focusing the business on JD. So no, I think it has been a great time. I think that, yes, it is fashion, and things are moving. And yes, you get some product and -- or some change, but that's part of what we manage every day. So I will say that the things that I will do differently, I think that, yes, we have been too optimistic at one point of time. And I think that we pay the price last January, as mentioned by Andy. But I think that except that, I think the performance has been great. We are on a record sales, and we move up the profit. So I think it's -- no, it has been a great time.

Just to add to that. I think standing back from the business as the Chair does, it's just impressive how much we've done under Régis' guidance and now with Dominic in the seats as well. If you add it all up, the disposals of the fashion businesses, the acquisitions we're making, the changes to the management team, the changes to the Board right across the business, we've been sort of gearing JD up. I mean the growth numbers on those slides was -- if you look back to 2019, is extraordinary. And of course, the slight risk of those kind of things is that when you put that much strain through an organization that was a much smaller organization, you don't quite have the systems and the processes and the infrastructure to deal with it. And so we've been backfilling all of that at the same time as doing all these other strategic things. And so all these things are not always apparent externally, but internally, there's a huge amount of work going into it, and it is a great credit to the team that we've got to this point, and we seem to have had a good first half with good growth. It felt normal, which is kind of a good thing in JD. Yes, sorry, over the back. You were early on. I'm sorry I missed you on that.

It's Nick Barker from BNP Paribas. I have a question on innovation and newness sort of -- we've spoken before on these calls, and you sort of said previously that you expect to see newness to land in the second half. I was just wondering if that's still on track and what the early feedback is from that.

So we always said that we will not see -- we'll see innovation coming, but that will not have a material impact, and that's where we stand today. So we have seen some great product, especially from Nike coming, but that will take time to get through the [ Ignite's ] scale and to -- so that will take time. And I think that I mentioned that yesterday night, too. So we didn't plan anything for the second half. I think we always said that it will be more next year, and it will be slow to come because it need to be -- it need to put that at scale. And so I think we are in a good place, and we are where we want it to be.

Okay. A couple more here. Who's doing the online? Are you managing the online questions or...

We will hand over to the operator.

We'll do these 2 first, but I just -- if there's any interest online, we should do that.