Investing.com — Shares in JD Sports ( LON: ) fell 10% on Tuesday after the UK-based retailer cut its full-year profit forecast, citing a “challenging and volatile” trading environment.
Despite organic revenue growth of 3.4% in the nine weeks to January 4, the company said market headwinds weighed on its performance, leading to the profit warning.
The company now expects its annual profit before tax and adjustment items to be between £915m and £935m, lower than previous projections.
“Considering the current headwinds in the market, we’ve done well,” Régis Schultz, chief executive of JD Sports, said in a statement.
While JD Sports posted a 1.5% rise in like-for-like revenue in December, driven by strong Christmas trading, overall LFL revenue in November and December fell by 1.5%.
Footwear sales outpaced apparel sales during the period, with brick-and-mortar stores outperforming online sales.
Retail sales also reported growth in Europe and Asia Pacific, although this was offset by weaker trading in the UK and North America.
“While I am generally pleased with our performance, the market headwinds were higher than we expected and therefore our full-year profit forecast is slightly below our previous guidance. With these trading conditions expected to continue, we are cautiously looking at the new financial year,” added Schultz.
Recent acquisitions contributed positively to results, with Hibbett in North America slightly outperforming the region’s broader business and Courir delivering strong results since its acquisition in late November.
Despite short-term challenges and a profit warning, JD Sports is well placed to remain a preferred partner for major brands such as Nike (NYSE: ) and Adidas (OTC: ), because of their strong retail capabilities and appeal to young, fashion-forward shoppers, RBC Capital Markets analysts said in a note.
Analysts see opportunities for JD to expand its U.S. demographics and improve operational efficiency in its warehouse and online offerings, which could boost margins.
While management improvements may reassure investors, RBC flagged execution risks associated with JD’s rapid expansion and reliance on Nike, which accounts for about 50% of its sales.
Year to date, JD Sports’ LFL revenue is flat, and for the full year, LFL revenue is expected to remain at similar levels. Organic revenue growth for the whole year is predicted at around 5%.
Despite these challenges, JD Sports reported strong gross margins, which are expected to remain stable at 48%, and a good inventory position. With strong cash management, the company anticipates closing the year with low net debt on a pre-IFRS 16 basis.
The profit warning followed a more promotional retail environment than expected, which Schultz said JD Sports managed without compromising its pricing strategy.
However, the retailer faces further pressure from specific costs, including a £6m acquisition charge related to Hibbett and a higher-than-expected £17m foreign currency impact.
