Broker UBS has upgraded its recommendation on JD Sports Fashion PLC (LSE:JD.) to a “buy”, saying the athleisure retailer has been less affected by supply chain disruptions than its peers and is expected to retain its recent profit margin gains in the US into 2023.
UBS said JD Sports’ US sports retailer peers have seen a 14% drop in assortment breadth in the past three months due to supply issues, while JD’s subsidiary Finish Line (NASDAQ:FINL) increased its assortment and items on its website are selling out at a slower rate than its rivals.
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UBS is forecasting a pre-tax profit of GBP859mln for the company for full-year 2022, well above JD’s own guidance of “at least GBP750mln”.
The investment bank said its analysis suggests that the strong sales momentum is likely to continue in the second half, with sales growth of 25% year-on-year.
“Even after allowing for significant inflation in costs around peak trading, we still forecast H2 PBT of GBP419mln,” it wrote, adding that higher growth and less margin pressure should drive a rerating to around 23 times 2022 earnings per share.
UBS estimates 52%-79% growth in full-year pre-tax profits between 2022-2025, which is 2%-8% above the market consensus.
The broker said sales of US$11bn-US$14bn could be freed up in the years ahead as Nike, with which JD has a strong relationship, moves to reduce the number of wholesale retailers. This could add GBP1.5bn-GBP2.2bn to JD’s sales to full-year 2025, and UBS is therefore forecasting sales growth of 70%-105% for the period.
UBS has a target price of 1,250p on JD Sports. It said around GBP820mln could be spent on mergers and acquisitions over the next 12-18 months, driving potential upside in the target price to 1,600p.
Shares were 2.8% higher at 1,068.50p in early afternoon.