JD Sports smashes expectations, and Dr Martens readies stock market flotation

“After such a strong start to the year, sadly the positive momentum failed to extend into the second trading week with shares across Europe in the red,” says AJ Bell Investment Director Russ Mould.

“The FTSE 100 fell 0.4% to 6,845, with miners, energy and consumer goods companies dragging down the index.

“The US dollar regained some strength, while the Brent Crude oil price fell 1.4% to $55.44 per barrel.

“After the euphoria of last week’s market movements, investors are now facing the realisation that Covid cases in the UK remain at elevated levels, while cases are also rising in places like Germany and China. The pace of the vaccine roll-out remains closely watched and any positive news on this front could put a spark back into equity markets.”

JD Sports Fashion

“This morning’s update from JD Sports does not read like there is a global pandemic going on.

“It grew like-for-like sales materially in the period encompassing Christmas. To guide for profit ahead of expectations despite the massive disruption resulting from Covid is a mammoth achievement.

“It also demonstrates the fact that retail spending itself has held up reasonably well despite the crisis – it’s just that sales have shifted from physical stores to the internet.

“In this context JD Sports’ online channel has delivered and then some, both in the UK and across the Atlantic. The company has also mastered the basics of retail, it is good at managing stock and costs, and crucially it keeps the cash flowing in.

“JD Sports has a very clear idea about who its customer is and what they want – namely trainers and so-called ‘athleisure’ gear which can be worn for working out and socialising (in more normal times) as well as hanging out at home.

“A short-term concern will be that its youthful customer base will be particular exposed to the mounting jobs crisis in the UK, given they are probably more likely to work in hospitality or other retail businesses.

“Longer term, while JD is still seen in a positive light by major sporting brands like Nike and Adidas the former, in particular, is shifting to a more direct-to-consumer model, selling more product through its own website. For now though, JD is still a valued retail partner.

“Given this encouraging update, investors will be even more relieved management did not take on the distraction of buying failing department store Debenhams before Christmas. The recent bolt-on acquisition of Shoe Palace in the US looks a much better fit.”

Dr Martens

“The imminent arrival of boot maker Dr Martens to the London Stock Exchange is interesting timing, coming so soon after the Brexit trade deal and revival in the UK market with the FTSE 100 having enjoyed its best start ever to a calendar year. If ever there was a good time to market a well-known British name to investors, it is now.

“Dr Martens is a classic British brand and once the chosen footwear of rebellious teens and adults. It is an iconic name in fashion and likely to attract the attention of investors both in the UK and abroad, eager to see how sales are going.

“A few warning signs flash immediately. The first is widespread consumer criticism over a decline in product quality. Once known as being reliable, long-lasting footwear, Dr Martens’ products have more recently been accused of having sub-standard stitching and soles which peel off after short use.

“Could it be that the business has suffered under private equity ownership? Many investors are sceptical about backing companies that are being sold by private equity, for fear they might have suffered from underinvestment and subjected to a “quantity over quality” approach for production.

“In the case of Dr Martens, it is worth noting that production shifted to Asia nearly 20 years ago and some critics suggest that could a key reason behind the apparent deterioration in quality.

“Its boots may look good, but the real test for investors to part with their money is whether the shares can go the distance. While the earning growth figures may impress, it doesn’t look good when there are already holes elsewhere in the investment case.”

These articles are for information purposes only and are not a personal recommendation or advice.

The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.

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