JD Sports tumbles after faltering start and analysts see mixed blessings from Foot Locker takeover

JD Sports shares fell 8% after reporting annual results and a worse-than-expected 2% decline in first-quarter like-for-like sales, driven by a significant 6% drop in North America, overshadowing better performance in the UK and Europe. While FY26 guidance was reaffirmed and analysts noted the company's undervaluation relative to Foot Locker's acquisition by Dick's Sporting Goods, concerns remain regarding the US market, consumer outlook, and potential competitive pressures, though a £100 million share buyback program was announced.

Analysis

JD Sports Fashion PLC experienced a significant 8% share price decline following the release of its annual results and a weaker-than-anticipated first-quarter trading update. While pre-tax profit for the year to March aligned with consensus forecasts and adjusted earnings per share slightly exceeded expectations, group like-for-like sales fell 2.0% in Q1, steeper than the c.1% consensus decline. This was primarily driven by a substantial 6% like-for-like sales drop in North America, which was considerably worse than the predicted 1% fall and overshadowed flattish, better-than-expected UK like-for-like sales and outperformance in Europe. Gross margins were reported to be roughly in line. Management attributed the US weakness to timing shifts in product launches, but analysts, such as Robert Krankowski at UBS, noted this could heighten concerns given the uncertain consumer outlook for H2 and the region's negative surprise. The reaffirmation of FY26 guidance offers some reassurance, though it may not fully satisfy investors. Furthermore, Dick's Sporting Goods' recent acquisition of Foot Locker introduces potential for increased medium-term competitive pressures. Conversely, Panmure Liberum's Anubhav Malhotra highlighted JD Sports' relative undervaluation, noting it generates six times the PBT of Foot Locker but has a market cap only 2.6x higher than Foot Locker’s purchase price. The company's updated medium-term strategy, focused on leveraging past investments and improving cash generation, including a £100 million share buyback and reduced capex, is viewed as prudent, with Shore Capital's David Hughes describing the valuation as 'undemanding'. Despite the 'not ideal' Q1 trading, the company remains profitable, with analysts encouraged by positive UK and European trends. However, North American performance remains a concern due to tariffs, uncertain US consumer confidence, the US economy, and high exposure to Nike, which is also undergoing a recovery. Nevertheless, JD's US brands and comprehensive geographical presence are seen as key medium-term growth drivers.

Key Decisions for Investors

• Investors should carefully weigh the significant Q1 North American underperformance and potential for increased competition from the Dick's Sporting Goods-Foot Locker deal against the reaffirmed FY26 guidance, positive performance in UK/Europe, and the company's undervaluation arguments.
• The current share price weakness, coupled with the announced £100 million share buyback and analyst views on relative undervaluation, may warrant consideration for long-term investors, though vigilance regarding US market recovery, tariff impacts, and Nike's performance is crucial.
• Monitor key indicators such as US consumer sentiment, Nike's product innovation and market traction, and JD Sports' progress in mitigating North American challenges, as these will be critical for near-to-medium term performance.
• Consider the company's robust cash generation and strategic shift towards capital efficiency, including reduced capex, as potential mitigants to current market headwinds and drivers for shareholder returns.