Broker tips: JD Sports, Dunelm

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Sharecast News | 21 Sep, 2023

Shares in JD Sports Fashion surged on Thursday after the sportswear retailer beat forecasts with its interim results, with broker Shore Capital hailing "significant progress" as it reiterated its 'buy' rating on the stock.

Pre-tax profit totalled £373.5m in the six months to 29 July, down 2.6% year-on-year but ahead of the £370.6m consensus estimate, which Shore Capital said was testament to the company's "strong operational efficiencies".

JD Sports Fashion also maintained its full-year guidance. "Given the challenging macro-economic environment, the steady outlook speaks volumes about the resilience of JD Sports' core consumers and the strength of its strategic initiatives," Shore Capital said.

Nevertheless, a poor performance by peers has weighed on sentiment in the market. "Weaker updates and consequent downgrades in the sports sector have impacted JD's share price, resulting in the loss of the gains since its Capital Markets Day in February," the broker said.

Shares have only risen 3% since the start of 2023, currently trading at 10 times current-year earnings despite offering a double-digit free cash flow yield.

"While conscious of the macro backdrop challenges, we reiterate our 'buy' stance on JD due to its strong structural position: the company’s robust balance sheet allows it to outinvest its peers, particularly in the US market as demonstrated by the statement today. In our view, JD has demonstrated significant progress over the year in line with the plans set out at its Capital Markets Day in February, with the group focused on building critical mass in Europe and reinforcing its corporate governance."

Berenberg has reiterated its 'buy' rating on Dunelm after the homewares retailer's strong annual results this week, saying that its market outperformance should continue.

"Dunelm reported strong FY23 results, reflecting the continuation of further market share gains, which has been the key driver of its revenue growth since its IPO in 2006. We expect market share gains to carry forward into FY24 given the strong start to the year, which has been volume-driven," Berenberg said.

The broker raised its target price from 1,340p to 1,370p after the results, which showed a 5.5% rise in sales to £1.64bn while earnings per share fell 8.6% to 75p – considerably better than a lot of the wider sector.

Berenberg said the company's end-market resilience appears to be related to its value offering: "The relative resilience of Dunelm’s end-market appears to be partly attributable to the low price point of the product base. Dunelm’s average product value is £14 and its average basket size has three items. We encounter investor commentary that incorrectly groups Dunelm with 'big ticket item' furniture names such as DFS, which have recorded considerably more demand decline – we view this coupling as misplaced."

Dunelm's shares are trading at 14.2 times forward earnings, below the three-year average.

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