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Was JD Sports’ Nike-driven jump justified?
Shares in trainers-to-tracksuits seller JD Sports Fashion (JD.) rallied on a positive read-across following forecast-beating fourth quarter results from US sportswear giant Nike on 24 June.
JD Sports has built its success on close ties with Nike and other powerhouse sportswear brands, so voracious consumer appetite for the Nike brand should be positive for the company short-to-medium term.
However, one must consider if the market is underappreciating a major risk to JD Sports, namely Nike’s highly successful focus on direct-to-consumer sales. Even as physical retail reopened, Nike’s digital sales grew by 41% versus the prior year and 147% compared to the pre-pandemic fourth quarter of 2019.
The increase in trainer manufacturers including Nike and Adidas selling direct to customers rather than only via retailers could have negative longer-term implications for JD Sports.
Hard-nosed Nike is investing in its direct-to-consumer network while it is already reducing the number of weaker retail partners carrying out its product. Cutting out distributors and going direct gives the Oregon-based giant greater control over the brand message and crucially, allows it to generate much higher margins, meaning JD Sports will need to stay on its toes.
Nike shares hit an all-time high following its fourth quarter results. Revenues for the period grew by 96% year-on-year to $12.3 billion. Its gross margin increased by 850 basis points to 45.8%.