Investing.com -- Shares of JD Sports (LON:JD) dropped 10% on Tuesday after the UK-based retailer lowered its full-year profit forecast, citing a "challenging and volatile" trading environment.
Despite a 3.4% growth in organic revenue over the nine weeks to January 4, the company said market headwinds had weighed on its performance, leading to a profit warning.
The company now expects its full-year profit before tax and adjusting items to range between £915 million and £935 million, down from previous projections.
“Considering the current headwinds in the market, we performed well,” said Régis Schultz, chief executive at JD Sports in a statement.
While JD Sports saw a 1.5% rise in like-for-like revenue in December, boosted by strong Christmas trading, overall LFL revenue across November and December fell 1.5%.
Footwear sales outperformed apparel during the period, with physical stores performing better than the online channel.
The retailer also reported growth in Europe and Asia-Pacific, though this was offset by weaker trading in the UK and North America.
“While I am pleased overall with our performance, market headwinds were higher than we anticipated and therefore our full year profit forecast is slightly below our previous guidance. With these trading conditions expected to continue, we are taking a cautious view of the new financial year,” Schultz added.
Recent acquisitions contributed positively to results, with Hibbett in North America slightly outperforming the region’s broader business and Courir delivering strong results since its late November acquisition.
Despite near-term challenges and a profit warning, JD Sports is well-positioned to remain a preferred partner for major brands like Nike (NYSE:NKE) and Adidas (OTC:ADDYY), due to its strong retailing capabilities and appeal to young, fashion-forward customers, said analysts at RBC Capital Markets in a note.
Analysts see opportunities for JD to broaden its U.S. demographic and improve operational efficiency in warehousing and online offerings, which could boost margins.
While governance improvements may reassure investors, RBC flagged execution risks tied to JD’s rapid expansion and reliance on Nike, which accounts for around 50% of its sales.
Year-to-date, JD Sports’ LFL revenue is flat, with full-year LFL revenue expected to remain at similar levels. Organic revenue growth for the full year is projected at around 5%.
In spite of these challenges, JD Sports reported strong gross margins, which are expected to remain steady at 48%, and a strong inventory position. With strong cash management, the company anticipates closing the year with a small net debt position on a pre-IFRS 16 basis.
The profit warning follows a more promotional retail environment than anticipated, which Schultz said JD Sports navigated without compromising its pricing strategy.
However, the retailer faces further pressure from specific costs, including a £6 million acquisition-related expense tied to Hibbett, and a higher-than-expected £17 million impact from foreign exchange.