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

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the JD Sports Fashion Plc FY '25 Trading Update. [Operator Instructions] Thank you. I would now like to turn the call over to Régis Schultz, CEO. Please go ahead.

Good morning, everyone. Thank you all for joining the JD Sports Fashion Plc 2025 Peak Trading Update Call. I'm Régis Schultz, Group CEO, and with me on the call is Dominic Platt, our Group CFO. Hopefully, you've had the chance to see our statement earlier this morning. On this call, we will give you a brief overview, and then we will hand over to you for any question you may have. This trading update covers our busiest period of the year, and I'm pleased to report that we saw robust trading across December. This performance is entirely consistent with our track record around key events. To give you some color on what it -- this mean in practice, I'd like to share a few examples that illustrate just how successful these events have been for us in the period and how busy they have been. We reached a new record daily global sales level hitting GBP 100 million for the first time ever on 2 occasions, with less than 1/4 of those sales coming from the U.K. Our omnichannel was strong with 20 million Click & Collect order in the U.S. And our flagship U.K. store in Stratford delivered a sales of over GBP 0.5 million on Boxing Day alone. That said, November has been disappointed and Black Friday below our expectation. So our robust performance in December didn't offset the soft November. This largely reflects 2 things. Firstly, November and Black Friday has been more promotional activity in the sector than last year and mostly driven by D2C and across the holiday period from one of our U.S. competitors being on minus 20 on Nike all across the holiday period. Secondly, footfall was below last year, reflecting a cautious consumer and a back-to-last-minute bargain buying from the consumer. We retained our operational and financial discipline in the period and our long-term view of the market and decided not to participate in the elevated promotion pricing activity in our key markets. We can see that the benefit of that in our margin. I think it's worth pausing here to remind people that our full price proposition is very appealing to our brand partners. And in return, we get great access to innovation and new product and the ability for our buyer and merchandising team to select what we want from and what we know will work for our customer and not what the brand wants us to take. The brand likes us and the brand and our customer, too. So to me, this is a solid foundation for a successful long-term strategy. In terms of brand, historically, we have seen a number of impact to product launch in the build-up to the peak season that have had a positive impact on footfall. This year, while there were some successful launches, including some Jordan Retro, and we see that in January 2 in the U.S., collectively, there were less number of those big events and not big enough to make a material impact. Finally, there is more economic uncertainty in our key market today than 12 months ago. We are starting to see unemployment tick up in Europe and in the U.K. Looking forward, we expect this challenging promotional condition to persist in the first half, and we want to be very, very cautious as the environment is still very volatile in the U.S., and we see the potential for higher unemployment in Europe and U.K. This is likely to suppress market growth throughout 2025. We are hopeful that this will be a step-up -- there will be a step-up in new product in the second half, but it's not going to impact materially until 2027. Before I hand over, I'd like to conclude by recognizing all the hard work across the business, which ensured that we were well positioning ahead of the Christmas and the peak period. This means when the consumer came, the shopper, they shop, and when they shop, they left with a larger basket size. This translated into 3.4% organic growth for the -- across November and December and a positive like-for-like in December. This reflects the expertise of our buying team, merchandising team, pricing, marketing, retail and operation to whom I would like to say thank you. So I would like now to hand over to Dominic.

Thank you, Régis. I'll now take you through our trading in a bit more detail. We delivered organic revenue growth over the period of 3.4%. We delivered growth in all our segments and across all our geographic regions other than in the U.K. We saw some benefit from our global store rollout program like the other regions do. Full year organic revenue growth is likely to be around 5%. Turning to like-for-like. Like-for-like revenue was down 1.5% for the period. We saw lower footfall than last year, but this was offset partly by a higher average transaction value, as referenced by Régis just a minute ago, which was driven by a combination of our promotional discipline and footwear outperforming apparel. Year-to-date, like-for-likes are flat, and we expect them to remain so for the full year. By region, we saw like-for-like growth in Europe and Asia Pacific, offset by negative like-for-likes in North America and the U.K. Consequently, North America and the U.K. were the markets where we saw the best gross margin progression over the period. Outside of like-for-like are our recent acquisitions, Hibbett and Courir. Hibbett performed slightly ahead of the overall North America region, while Courir, which completed towards the end of November, had a good peak season. Now turning to gross margins. Reflecting our planning for and discipline during the peak trading period, we achieved a gross margin for the period of over 48% ahead of last year. And following the post peak sales season, we expect the full year gross margin to be in line with last year. Now just turning to the balance sheet. Our level of preparation and deep understanding of what our customers wanted to buy this year has meant that we have some -- come out of peak comfortable with where we have landed stock-wise. We bought well, so we sold well. Whilst revenue is slightly below our expectations, we've managed our stock position well. And secondly, we expect to end the financial year with a small net debt position. This is after investing around GBP 1.4 billion in the year on the Hibbett and Courir acquisitions and is a testament to the strength of our cash generation and cash management. Finally, turning our thoughts on the outlook for the rest of this financial year. The trading environment has been volatile and challenging through the year. What we've seen is that the consumer has responded well to most of the key trading events. And what we've done is deliver a strong performance in those periods. Outside these periods, we have taken and will continue to take a considered and measured approach to protect our long-term business model and, ultimately, profitability. So in terms of the FY '25 guidance, I've given a few indications already, but to draw it all together, we expect like-for-like revenue to be broadly flat for the year and organic revenue growth to be around 5%. We expect gross margins to be maintained at a similar level to last year, reflecting our continued financial and operating discipline. And finally, we expect full year PBT to be between GBP 915 million and GBP 935 million. This is a slight change to previous guidance and reflects the 1% lower like-for-like than anticipated, which is worth around GBP 30 million. Additional acquisition accounting impacts with Hibbett totaling around GBP 6 million, a small incremental FX impact -- translation impact of GBP 2 million and offsetting those 2 pieces, a contribution from Courir following acquisition of around GBP 7 million. So thank you. I'll now hand back to Régis for any final thoughts.

Thank you, Dominic. Also with this trading update, I wanted to touch briefly on a couple of highlights regarding our continued strategic delivery. Firstly, we passed through the 200 new JD store by the end of November, including around 50 conversion from other [ fashion ] across the U.S. and Europe, mostly Eastern Europe and Spain and Portugal. We continue to monitor the program against a 3-year payback period hurdle, and actual payback continues to be quicker than that. And secondly, and at long last, we complete the Courir acquisition. In fact, Dominic and I are sitting in the Courir office in Paris as we speak. The acquisition extend our reach of our complementary concept proposition by adding a more female fashion-conscious and older customer base to the group. And we are much more -- we are much look forward to working with the team here and to their success as they have done through the peak period. So reflecting on 2024, I think, as Dominic said, we guide -- at the beginning of the year, we guide around like-for-like between 1% to 4%. We always said that we were looking at the bottom of that. At that time, the market, our competitor, our key supplier who was more -- much more bullish on the second part of the year, we've always been very cautious about it. I think we were right. We were an unfortunately not enough cautious. We should have been a little bit more cautious, and we plan for the same level of promotional activity. And it has been higher level of promotional activity, especially across Black Friday, which is a key period. So at the end of Q3, we were around 1%. I think we will finish flat, and that 1% difference is equal to the GBP 30 million profit that is missing compared to our forecast. So that's something we need to reflect on. We will be very cautious for next year, and we look for delivering our forecast for next year. Thank you. So now we're going to -- back to the operator to pass to the question.

[Operator Instructions] Your first question comes from the line of Jonathan Pritchard of Peel Hunt.

Two for me. Firstly, I know you touched on that you saw industry conditions would stay difficult for the first half. But do you think that will be -- the return to normality will be at the end of the first half? Or are you concerned it could drag on a lot longer than that? Essentially, when do you think the industry conditions will stabilize? And secondly, just on that stock point, obviously, a good stock performance. Is there anything to see from a geographic perspective?

Okay. So I think we -- last year, everyone was saying the second half will be better. So I think that I want to see what happened and -- before saying it. So I think that, yes, what we know is that the announcement of Nike has been really very positive. I think the reduced promotion on -- back to the D2C arms on full price is what is needed for the industry and for the long-term growth of this industry. So I think it's all good news. The focus on key wholesaler and we have seen the difference from the time that Elliott has been in charge, all that is good. It's just that the time it takes to put that in motion and to clear some of the stock that was committed before Elliott was on board. So that's why we are cautious. We know that to replace some big key franchise will take time. So that's why we believe that 2025, we should be very cautious about it. Concerning the stock position, it's across all the geographies. So we have maintained our discipline. Especially last year, you remember in U.S., we had to -- we participate in promotional activity, and our margin was impacted by that. This year, we have been much more putting the same discipline and rigor that we have in Europe in U.S. So we didn't have to participate. So we are in a very good stock position in all our business, plus we clean a lot of stock in Hibbett, which we put the same discipline that didn't -- that was less existing in Hibbett. So Hibbett is down 20%, 25% compared year-on-year in terms of stock. So we are in a very good position in all our business, and we apply the same rigors across all our business.

Your next question comes from the line of Thierry Cota of Bank of America.

I have 2 of them. First, in your minus 1.5% like-for-like for 2 months, can you tell us what has been the performance of Nike versus the rest of the brands, number one? And number two, on gross margin, you insist on your close to 50% gross margin, which is effectively well above, notably, the U.S. peers. Now do you consider it to be sustainable? Or more precisely, could you be concerned that it could be -- it could come at the expense of sales and, in fact, at the expense of operating leverage at the OpEx level?

So for the first question, we don't give this information because it will give information on a listed company. So that's -- we will not answer this question. On the second one, we don't believe it's at the expense -- for sure, on the promotional side, we will certainly lose 1 or 2 -- some sales. But it is -- having a full-price business, it is a success of a -- it is a successful business. You can see that with Zara, with the -- with all the key successful fashion business, if you are not on a full price, the customer is waiting for the discount. And you end up by destroying your business. So our model is about full price. And our margin is not that we are making more margins than the other. It is that our discipline around stock and management of stock is better, which means that we have the -- we are building a long-term confidence from the consumer that when they buy with us, they will not find the same product when we got that at a cheaper price. And I think that, as you know, almost half of our product are SMU. So we are not exposed directly. If we have the same product than our competitor, we will adjust our price, not always a promotion, but at least the price. So I think it's a long-term strength, not a weakness.

And Thierry, just on a point of clarification. You need to be careful when comparing our gross margin with U.S. players because U.S. players tend to include more in their cost of sales. It's not directly comparable.

Yes. It's not comparable. It's higher, but it's not comparable because the way they report margin include rents for some [ of their stores ].

Okay. And so there is no scenario -- at this point, your objective is to remain around that, around 50% gross margin going forward, that's the central scenario.

Yes, yes. And I think we have proved that for the last 3 years. So I think that we have the track record of that. And it moved a little bit, no? We have been at higher during COVID because, at that time, there was no products. So we are adjusting, and we are in the market where we adjust. We do -- at one point of time, during COVID, we had almost no promotion, so our margin was up. I think our margin is down 1.5 points compared to the peak during COVID. So we have adjust that, but we believe that the level of margin that we have today is the right level of margin.

Your next question comes from the line of William Woods of Bernstein.

Two for me. Is there anything to highlight in terms of product or brand differences across the geographies in terms of Europe, North America and the U.K? And then secondly, I suppose what do you think drove the main difference in the strength in Europe versus the weakness in the U.K. and North America?

Yes. I will start by the second one. I think Europe, you need to remember, our store estate is younger in a certain way. So I think you benefit from the new opening more than you benefit in the U.K. especially, but even in the U.S. So I think that this part is taking one part. The other part is the online business in the U.S. has been impacted by the D2C -- increased promotional activity from D2C player, which didn't happen or happened less in Europe. The minus 30% from Nike happened in the U.S. didn't happen in Europe, so -- which was a higher level of discounting than the year before. So I think that's the key things. And the other part has been that we -- in the U.S. and in U.K., this impact of promotion activity has been higher.

Your next question comes from the line of Grace Smalley of Morgan Stanley.

This is Gabrielle Rubin from Morgan Stanley on for Grace Smalley. Two questions from me. Firstly, on the brand, what are you seeing in terms of brand product innovation? And when would you start to expect to see this improve? And then looking on to the U.K. consumer specific...

Sorry, sorry. Gabrielle, we didn't quite capture that. You said, what do we see in terms of brands?

Brand, product innovation and when would you start to...

The brands, okay. Thank you.

Yes. Okay. And then the second question on the U.K. consumer. It's been a key topic of conversation year-to-date. Can you comment on what you are seeing in terms of the health of the consumer as it stands today and how you're thinking about the macro outlook as heading into FY '26 and then how this current backlog impacts JD's key customer?

Okay. I think U.K. consumer, 2 things. I think that -- I think we have seen -- and which, to be fair, everywhere, we have seen the back to the pre-COVID way of trading. So that means that they wait for the last minute and the last drop and the last promotion. So I think that during COVID and just after, because product was scarce, we saw a different pattern. Now we're back to the same pattern where they wait until the last, last minute, so -- which is always the very, very stressful for retailer. So that's the first thing. In terms of the second one, I think we've seen, and I think all retailers has report the same, traffic has been down in the U.K. And we've seen, I think, a very cautious customer because of -- for the first time, usually, Europe is saving rates are very high in Europe, less so in U.K. and nothing in U.S. And we see that following the -- all the negative view around the debt and all the stuff that the consumer is starting to save money, which is quite unusual in not spending the money. So I think that we have seen that. And the last one, which is the most worry for us is unemployment. I think that following the increased salary and especially the increased NI, I think that there is a temptation, which is a normal reaction from the business to review their staff costs and reduce the number of hours, which will be a bad news for the economy. And for us, as you know, one of the critical things for us is the unemployment because our customer -- our key customer is a young customer, is the one that is the most impacted or the first impact by raising inflation or reduction of number of hours because most of them will have temporary job and all of that stuff. So that's where we are very cautious with U.K. because of that. In terms of brand, I think we see -- what is interesting is that -- and you have seen in our statement, footwear has done better than apparel. I think that we have seen plenty of innovation, plenty of brand, product -- new product, and that has been that the market has been a positive market. And we -- and for Nike, we see a lot of good things coming. The only question, which is what they say that you have big franchise and to replace with -- you need a lot of new product to replace the end of life of some of the big franchise, especially Dunk. So that's where it is. But I think we have seen a lot of good and exciting things. I think on apparel, which has been more impactful, I think we see a lot of things happening out of our direct reach, the Shein, the Temu on one side, Temu fashion side on the other side or more D2C model. So it's a much broader industry, and it's -- we compete with a much broader set of competitors. So whereas in footwear, it all stay in the same family. So it's coming from one brand to another one, but we see a great health of the sector in footwear.

Your next question comes from the line of Monique Pollard of Citi.

The first question was just, obviously, you mentioned the product launches where they've happened in the period has gone well. I just wondered if you could give us any color, ex-Nike on which brands have been performing relatively well for you. And then the second question that I had was just around Hibbett and Hibbett performance. You mentioned that in the period, it traded slightly ahead of the wider North American business. And clearly, that's despite it at having, from my understanding, slightly more Nike exposure. So just wanted to understand what accounts for that slightly better trading of Hibbett.

Okay. So I think that on Hibbett, I think it's mostly we -- the stock discipline and the quality of the stock. I think that we are starting to put our discipline and our diversity of brands, which, usually, U.S. retailer has been very focused on their major brand. And I think we bring more diversity and we highlight the diversity to the team. And I think that the benefit from -- they're starting to benefit from that. So that will be for Hibbett. I think in terms of -- I think we have seen great performance from adidas, from On running, from New Balance, very impressive. So -- HOKA. I think that's a lot of growth we have seen in terms of that launch of product. In terms of specific, i.e., products that we were referring, Dominic and I, is much more -- this is a much more Jordan view. I think we have seen last year plenty of release from Jordan of, what we call, [ highest ] product with almost a weekly or biweekly. This year, they have been reducing that, but the ones they have done has been very successful. That was the point that we made, less but better. And I think that we can start to see it coming back because consumer are starting to wait for them. Whereas in the past, they were coming too frequently. And in fact, it killed itself, the [ highest ] principle because you had one almost every week or every 2 weeks. And the last one, especially we had one in January, which was very successful with Jordan 3. So we see that coming. And I think that it's very pleasing to see Jordan back to growth.

That's very helpful. Sorry, just one follow-up on Hibbett. So you've already been able to sort of improve the portfolio of brands that they're selling into Hibbett that quickly.

Slightly. It's not massive, but we have seen some green shoots, yes. Development of -- New Balance, especially. I had a meeting with New Balance to say how we can increase that with adidas. So I think they can see what we are selling and how we are selling it. So yes, but it's early days.

Your next question comes from the line of Warwick Okines of BNP Paribas Exane.

Two questions, please. Firstly, could you give us a sense of your full price mix? You talked about preserving it over the peak, and I guess that sort of extra promotional activity was one of the things that surprised you in the market. So sort of where are you in full price mix? And secondly, in the past, Régis, you've talked about looking forward to some newness coming in, in spring/summer. Is that a product that you had expected some months ago? Is that product actually arriving? Or have plans changed from the brand partners?

Yes. So full price, we are on -- we have -- for the whole retailer compared to the intake and net price, we have the lowest difference that exists for all the brands. So we don't communicate on it and -- but it's, really, we are at a very high level around the 2. And I think that's really something which is around the discipline on our stock management, and you can see that in our numbers every time. In terms of new product coming from spring, it is mainly, as we say last time, around running, which Nike is delivering, and we can see some great things. Same for adidas, adidas has been studying on running. We've seen with the success, we are able -- that is starting to come. So we will see some great things on running, which will not replace the key franchise, which are linked to basketball, but it will be a start. But I think we've seen great things from running from Nike and adidas.

And how optimistic are you about the apparel category into this year?