RBC Capital downgrades JD Sports to 'underperform'

RBC Capital Markets downgraded its stance in shares of JD Sports to ‘underperform’ from ‘sector perform’ on Monday as it argued that "strong recovery prospects are less certain".

The bank said JD Sports has a strong track record and management team. However, its longer-term margin recovery prospects may be compromised by a shift in customer shopping patterns and to online.

In addition, it said the stock’s valuation already largely reflects a strong v-shaped recovery, hence its decision to adopt a more cautious stance on the shares.

RBC said it has seen some encouraging signs in terms of customer willingness to return to stores, with conversion up and likely some pent up demand to come through in the UK. It noted that in the UK, JD has a roughly 50:50 split between malls and high streets so is well hedged for customers choosing to shop locally.

"However we do expect pressure on sales densities for stores in more urban, touristy locations, which rely more on public transport, and a structural shift online, which we see as a potential constraint to margin recovery," it said.

It also argued that a shift to online will make it harder for JD to get back to historic margins, given the ease of switching to branded websites and the higher fixed cost base of JD's stores.

"On the one hand fashion is a high priority purchase for many younger customers and we expect the strong casual/athleisure trend to continue. However we also expect more employment pressures from later this year to affect the earning power of younger shoppers."

RBC upped its price target to 625p from 570p.

At 1030 BST, the shares were down 2.3% at 675p.