JD bucks the retail trend (and no sports kit in sight)

Its young, brand-conscious, customers are proving largely immune to the credit crunch fallout, James Thompson reports
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Most retailers are enduring their worst trading since the 1990s. The squeeze on UK consumers' disposable income has hit them hard. But JD Sports Fashion (formerly The John David Group) bucked the gloom yesterday with a set of figures that would turn many retailers green with envy: pre-tax profits up 54 per cent to £12.4m and like-for-like sales up 5.8 per cent for the 26 weeks to 2 August. Since the end of its financial year trading has remained buoyant.

So why is JD showing its rivals, such as Sports Direct and JJB Sports, a clean pair of heels and what are its prospects for the year ahead?

JD has been a haven for sports and fashion conscious teenagers since it was founded in 1981. But its performance has not always been stellar. Just three years ago, it posted pre-tax profits of about £3m, when it's fair to say the retailer had lost its way somewhat, but this financial year it is on track to hit pre-tax profits up to £48m. Over the past three years, JD has trimmed the number of its stores, revamped them and overhauled ranges, as well as improving customer service and sales conversion rates.

The group, whose core customers are between 13 and 15 years old, has benefited from these customers being largely immune from the worst effects of the credit crunch: spiralling mortgage, food, fuel and energy costs, as well as rising unemployment and falling property prices.

The Investec analyst David Jeary, says: "Their target market – which is very substantially, but not exclusively the under 25s – are still spending relatively freely, certainly compared to older families with mortgages. They have differentiated themselves from competitors. JJB and Sports Direct cater to a much wider market in terms of age range, such as families."

In addition, JD does not rely on sales of replica football kits and therefore its executives, unlike those at rivals JJB Sports and Sports Direct, did not cry into their beers when England failed to qualify for this year's European football championship. In fact JD, which derives about half of its sales from footwear, sells very little sports equipment apart from items such as bling-inspired black and gold footballs. And there are plenty of operational improvements that JD has delivered off its own bat. Its executive chairman, Peter Cowgill, says: "We have rationalised the store portfolio and reduced cannibalisation where stores were in close proximity to other stores." In December, JD unveiled its latest store format, a stone's throw from London's Oxford Circus Tube station, which is easy to navigate and boasts a sleek black interior.

However, products ultimately put money through tills and JD's enhanced recent offer has recaptured its former glory. Mr Cowgill says that its buying and merchandising teams have differentiated the product offer, including its own brands and exclusive tie-ups with third-party brands, over the past three years. "We have always tried to be a retailer that delivers aspirational and stylish products," says Mr Cowgill.

JD has sold its own-brand products, including Carbrini and McKenzie, for a number of years, but Mr Cowgill admits that the Carbrini brand had become "dormant". He adds: "In the last two years, we have developed it into what is it is today."

However, the Kaupthing analyst Matthew McEachran singles out McKenzie. "McKenzie has been the stalwart and in certain categories it has out sold leading sports brands."

JD has also beefed up its portfolio of brands, such as Timberland, Fred Perry and Lacoste, that it sells exclusively among sports retailers, further differentiating itself from JJB Sports and Sports Direct. JD's chief executive, Barry Bown, says: "We have accentuated the product differentiation. It would appear that we have obtained a larger market share."

Investec's Mr Jeary says that JD's strategy is to focus on fashion. "Their view is that their target audience have the disposable income to pay for the right brand and the right look." Reflecting its focus on fashion, The John David Group has changed its name to JD Sports Fashion in July.

JD's standalone fashion fascias Scotts and Bank represent a considerable opportunity for JD. It acquired the branded fashion retailer Bank, which sells labels including Gio Gio, Firetrap, Superdry and Henleys, for £18.5m in December. Over the next four years, JD is to develop Bank – which was loss-making at the time of acquisition and competes against retailers such as River Island – from 47 stores to between 200 and 250. It plans to increase Scotts from 37 stores to up to 60 stores in the same period.

Yesterday, JD said Bank's first-half results were in line with expectations and recent trading has been much stronger than in the equivalent period last year. Mr McEachran says the "blue sky" potential for Bank is that JD could become a £200m business making a £10m profit, compared with a £50m business that was making a loss at the time of acquisition. He forecasts that JD could exceed its full-year forecast for pre-tax profits of £44.5m this financial year, but forecasts flat profits for the following year. Investec and Kaupthing currently have a buy recommendation on JD. Sports Direct's executive deputy chairman, Mike Ashley, who had owned 12.5 per cent of JD, seems to agree. It emerged yesterday that he has increased his stake to 13.2 per cent.

Mr Cowgill declined to be drawn on changing customer shopping patterns during the credit crunch, but said the retailer's conversion rates had increased as footfall on the high street had fallen this year. If retail is detail, JD seems to have got his detail spot on this year.