JD Sports Fashion plc

Good morning ladies and gentlemen and welcome to JD Sports Fashion plc HY27 results presentation. At this time all participants are in listen only mode. Later we'll conduct a question and answer session between JD management and sell side analysts. If you wish to ask a question we ask that you please use the raised hand function at the bottom of your zoom screen. Instructions will also follow at the time of the Q&A. I'd like to remind all participants that this call is being recorded I'll now like to hand over to the CEO of JD Sports Regis Schultz to start the presentation foreign

Good morning, everyone, and thank you for joining us for our half-year results. I'm Régis Schulz, CEO of JD Group, and I'm joined here today by Dominique Platt, our CFO. On the agenda for the presentation, I will start with a key message from the first half. Dominique will then take you through the financials and guidance before I return with an update on the business and our strategic progress. We will then open for Q&A. We deliver a resilient sales performance in the first half against a backdrop that was challenging for our industry and for our customer. Youth unemployment and cost of living pressure both increase while the footwear product cycle continues to evolve in a highly promotional market. Group organic sales were down 0.7%, including a 2.1% contribution from new selling space, despite having over 100 fewer stores overall, in line with our strategy of fewer, bigger, and better stores. Our response to a maturing market and challenging trading conditions is to control the controllables. That means focusing on our customers, bringing them the best, latest and greatest products, investing in our omni-channel proposition and maintaining tight discipline on our costs and capital. We are making clear progress against our strategic priorities and delivered against significant milestones. We are investing to improve what we offer to our customers and to enhance the efficiency and productivity of our assets. I will come back to this later. Our product proposition is strengthening and more resilient than ever. While footwear sales were softer overall, we are encouraged by the momentum in running, performance and lifestyle, and newer footwear styles. Apparel and accessory increased to 36% of group sales, in line with our strategy, supported by a strong product lineup, supplemented by our own brand and licensed brand, with faster and more agile reaction to customer preference. Online was another area of progress. Online sales grew by more than 5%, rising to 20% of group sales. This was supported by a continued rollout of our new e-commerce platform, Shopify and commerce tool, which unlock new capability, expense choice and service for our customer. Our discipline on cost and capital has again strengthening our balance sheet. Net cash improved by nearly 300 million pounds year on year, even after returning 260 million pounds to shareholder through buyback and dividend over the last 12 months. This is clear evidence of the high cash generation of our business. After all, cash is king and cash is real. Finally, our full year 27 final guidance is unchanged from the Q2 trading statement. Profit before tax and adjusting items of between 700 million to 800 million pounds and free cash flow of 460 million to 520 million pounds. This reflects both the market backdrop and also our continued focus on cost and capital discipline. I will now hand over to Dominic to talk through the financial in more details.

Good morning everybody and thank you Régis. So let's start with our headline financials here on slide 5. And unless stated otherwise, all my commentary is on a constant currency basis. As Regis outlined, total sales were down 0.8% against a tough backdrop. Allowing for a small disposal in the prior year, organic sales were 0.7% lower. Net new space contributed 2.1 percentage points to sales, despite us having 106 or 2.2% fewer stores, demonstrating improving productivity in our new space. And to complete the sales bridge, like for like sales were 2.8% lower. During the period, we maintained our trading discipline within a highly promotional market. To stay competitive and engage with our customers, we made controlled price investments, particularly in our online offer. The underlying impact of these investments on our gross margin was a reduction of 50 basis points. This was partially offset by higher marketing contributions year on year. For accounting presentation purposes, the corresponding marketing costs that are funded by these contributions are classified in OPEX. Our statutory gross margin was therefore down 20 basis points year on year. Operating costs, excluding adjusting items and interest on lease liabilities, were 1.6% higher year on year, driven by costs related to new store openings. Excluding new space, like-for-like operating costs were flat year on year. More on that later. Overall, the group's operating profit, including lease interest, was £294 million, 19.5% lower year on year. with an operating margin of 5%, 120 basis points lower. This is typically lower than the full year operating margin, reflecting the seasonality of our business, with our key annual trading periods of Black Friday and peak Christmas and holiday season to come in the second half. After net finance expenses, which were 33% lower year on year, profit before tax and adjusting items was £282 million. Our adjusted earnings per share were 13.7% lower on a reported basis at 3.97 pence, with a lower percentage reduction compared to profit before tax and adjusting items, showing the economic benefit of our share buyback programme. For completeness, statutory PBT was £241 million, 74.6% higher year on year. This reflects significantly lower adjusting items, which in the period principally related to the amortization of acquired intangibles. Our free cash flow performance in H1 improved by 50 million on H1 last year. The free cash outflow of 18 million reflects the usual seasonality of our business with working capital outflows tending to peak in the middle of the financial year. In line with our capital allocation framework, the board has declared an interim ordinary dividend of 0.4 pence per share, representing one third of the previous year's total dividend. This represents an increase of 21.2% year on year. And finally, as of the 1st of August, before lease liabilities, we had net cash of £168 million. As Reggie said, that's an improvement of almost £300 million versus net debt of £125 million a year ago. This slide demonstrates that JD is a well balanced, diversified and global business. As a measure of that global diversity, 76% of our sales came from outside the UK, from markets across North America, Europe and Asia Pacific. And we have significant runway to further grow our market shares in these regions. Our online sales penetration improved year on year to 20% of sales, with online sales up 5.2%, driven by good growth in North America, Europe and Asia Pacific, and well supported by the ongoing evolution of our online ranges and technology platforms. In the UK, online sales were flat year on year. The overall 20% penetration is an average and it varies across the group with the UK at 25%, 20% in North America and in the high teens in Europe and Asia Pacific. This provides ample opportunity for growth, particularly outside the UK. As Regis will touch on later, we continue to make significant progress in building out our omnichannel proposition, strengthening our retail ecosystem to meet customers wherever and however they choose to shop and unlocking new capabilities to support higher traffic conversion and basket values. Organic store sales were 2.2% lower year-on-year, reflecting lower footfall outside key events, partially offset by improved conversion and the contribution from net new space. Organic online sales were up 5.2%. Turning to category, our agile multi-brand model provides a diversified customer proposition through our footwear, apparel and accessory ranges. In apparel and accessories, organic sales grew by 4%. Our apparel proposition is in excellent shape and we continue to enhance our assortment across athleisure, performance and streetwear. Apparel and accessories now represent 36% of sales. This is an average, with lower penetration outside the UK. We believe there is significant scope for growth in this category, particularly in North America. in footwear organic sales were three percent lower throughout the half we continue to see a significant shift in the global footwear product cycle given the transition between newer but smaller in value franchises and larger end of cycle product lines we saw strong growth across brands less affected by this transition and particularly with performance-based running silhouettes and newer footwear styles that Regis will touch on later Finally, the share of our other category, which includes outdoor living equipment and JDGym's memberships, increased to 4% of our sales mix. Turning now to our geographic regions and starting with North America, where we saw a mixed performance through the first half. In Q1, trading was supported by key consumer moments, including the US tax refund season and product launches. performance softened as q2 progressed reflecting weaker consumer sentiment due to incremental cost of living pressures a slower quarter for high heat footwear product and the deferral of back to school demand into august overall for the half north america organic sales were down 1.7 percent and like for like was down four percent Within this, our JD Fascia delivered a more resilient performance versus our complementary businesses with like for like of minus 1.1%, supported by a relatively more diverse product proposition. Operating margin was 220 basis points lower year on year, largely due to deleverage impacts and the ongoing wind down of the standalone finish line business. On the deleveraging point, it's worth noting that our sales are typically skewed to the second half, given peak trading in Q4, which applies to all regions. On finish line, which remains a significant but short term factor, this business was the primary source of promotionality amongst our faces in the half. However, we also made targeted price investments across our complementary businesses, particularly in Q2, in order to stay engaged with consumer dynamics. The lower operating margin was also partly driven by investment to strengthen the brand positioning of the JD Fascia in North America. This was partially offset by ongoing operational and back-office efficiency measures across procurement, technology and supply chain and logistics. Turning now to Europe. This region delivered organic sales of minus 0.5%, a resilient performance in a promotional market, supported by good growth across our sporting goods businesses. Europe's operating margin was flat year on year with labor cost inflation and costs related to new space offset by cost efficiencies across retail online and supply chain operations including the benefit of ramping automation within our hairline distribution center in the Netherlands and the unwind of the associated double running technology and supply chain costs. As a reminder, we expect over £20 million of cost benefits across FY27 and FY28 as these double running costs fully unwind. In the UK, we saw an improved performance at JD as the half progressed, supported by apparel and accessories, which benefited from strong sales of football replica kit in Q2. Underlying performance remained challenged, particularly in footwear in a promotional market. This was partially offset by continued momentum in JD gyms, as well as an improved performance in our outdoor business, which made meaningful operational progress in the half, including the ongoing simplification of its store estate and a well received refresh of its product ranges. Overall, UK organic sales were down 1.6% for the half. The UK operating margin was 130 basis points lower year on year, largely due to targeted price investments and operating costs deleverage impacts. And finally, Asia Pacific delivered like for like sales growth of 3% and organic sales growth of 10.7% with broad based strength across footwear, apparel and accessories and its online channel. Operating margin was 90 basis points lower, largely driven by new store openings. Taking a look now at the profit bridge on slide eight. Please note that for the purpose of underlying analysis, I have netted off marketing contributions in gross margin against the corresponding marketing costs within OPEX, which is reflective of how we manage and report the business internally. Starting with the headwinds from the left hand side the like-for-like gross margin rate reduction of 60 basis points which excludes gross margin from new space represented 37 million pounds and like-for-like sales of minus 2.8 percent at a constant gross margin rate represented 92 million pounds to the decline. The contribution from net new space and annualizations was 20 million pounds. The next bar shows like for like OPEX inflation of £45 million, primarily driven by inflation in our labour costs, including higher salaries, as well as technology, digital and marketing investments. We maintained a strong focus on cost management in the half, delivering £57 million of variable and structural cost reductions through labour efficiencies, productivity initiatives and operational synergies, thereby fully offsetting like-for-like OPEX inflation. More on this in the next slide. The year-on-year mark-to-market movement of £26 million, which is non-cash, reflects a credit of £13 million in the half versus a charge of £13 million in the prior period, We expect an offsetting mark to market charge of over £10 million in the second half. We saw a £6 million reduction in net finance expense which excludes lease interest. The reduction was largely due to our cash generation and the benefit of the comprehensive debt refinancing we completed in July last year. And finally, other, which is largely the impact of translation FX year-on-year, was £4 million. Against a challenging market and industry backdrop, maintaining our sharp focus on costs continues to be a priority. As I described in the previous slide, we fully offset like-for-like cost inflation in the half through our variable and structural cost reductions. We proactively flex store staff levels based on customer activity to help manage labor cost inflation. We continue to leverage our technology to drive operational efficiencies as we automated internal processes and we progressed the rollout of RFID in our JD UK stores. We are starting to realize benefits from our Hairland DC related to the technology and supply chain double running costs. And beyond these structural actions, we took a broad based approach to overhead management, driving savings across everything from procurement to travel and a range of other cost categories. All delivering meaningful savings in H1 with further benefits expected as these actions continue to flow through to H2. There is more we are going after in H2 as we leverage our new finance systems and scheduling tools and make further progress in modernizing and automating our distribution centers to name just a few examples. We expect these actions to deliver additional benefits in H2. So overall, we expect cost savings to be more H2 weighted. And as set out in May, we're on track to significantly offset like for like OPEX inflation for the full year. On the next slide, we set out our summary cash flows for the half, starting with our statutory PBT of £241 million. Depreciation and amortization was 450 million pounds up 19 million pounds year on year reflecting investment in our stores, supply chain and technology. Lease repayments were 303 million pounds up 49 million pounds year on year. This increase was partly driven by seven lease payments made in the period compared to six payments in H1 last year due to the first of every month being the key lease payment date in many of the countries we operate in. Overall, operating cash flow was £433 million for the half. The changing working capital resulted in a net outflow of £144 million, which compares to an outflow of £263 million a year ago. This included an increase in inventory of £308 million, reflecting the typical seasonal investment in back-to-school stock, and an inflow of £164 million related to net payables. Gross capital expenditure in the half was £175 million, down £41 million year on year. Tax, interest and other cash outflows were £132 million. Overall, free cash flow was an outflow of minus £18 million, an improvement of £50 million on H1 last year. Dividend payments and share buybacks in the period were a combined £144 million. Overall, we saw a reduction in net cash of £143 million since the year end, leading to a closing net cash position on the balance sheet of £168 million before lease liabilities. This marks an improvement of £293 million compared to H1 last year, after £260 million of cash returns to shareholders over the last 12 months. We continue to take a disciplined approach to capex with a strong focus on returns. Gross capex for the half was £175 million, equivalent to 3% of sales, notably lower than the 3.6% of sales in H1 last year. This was driven by the completion of our supply chain investments in Europe and tighter store-related capex, down 19% year on year. I'll come back to this point on the next slide. Reflecting our discipline, our capex guidance for the year is now £350 to £400 million. Finally, we continue to be focused on maintaining a strong and efficient balance sheet. Including lease liabilities, our net debt was just over £2.9 billion, representing net leverage of 1.5 times. and including the Genesis buyout option in FY30 and FY31, our pro forma net leverage of two times remains in line with investment grade levels. Our overall liquidity position remains strong, providing us with significant headroom, including undrawn RCFs, total liquidity at period end was 1.7 billion pounds. Given the challenging global market backdrop, our highly targeted approach on store investment and tight discipline on the application of our targeted rate of return serves us well. While our stores and gyms capex was 19% lower year on year, our approach is delivering good results. Strategically, the investment in our store estate is increasingly as much about improving the productivity of our existing store estate as it is about new space. through relocations, upsizes and conversions, including initiatives such as our Fewer, Bigger, Better approach in the UK, in the period we increased our focus on optimizing the productivity of our existing stores and catchment areas with 48 relocations and conversions completed in the half. These actions contributed 0.8 percentage points to sales or 40% of the contribution from so-called new space. As you can see on the right hand side, we have introduced comparable sales as a supplementary sales KPI. We believe this metric provides us and you with a more complete view of like for like performance by including all relocated and upsized stores. And also a more balanced view given our traditional like for like measure only captures the cannibalization effect on stores in the vicinity of a relocated store. On this basis, comparable sales were down 2% in the half versus like for like sales down 2.8%. Given the strategic importance of our ongoing actions to optimize the existing store estate, we consider comparable sales to be a more meaningful and consistent basis for assessing the underlying sales growth of our business. It's also the metric used by many of our US peers, so provides better comparability. Over time, we expected to replace our current like for like sales measure. Outside of relocations, upsizes, conversions, we continue to take a disciplined approach to new store openings. In H1, we had 45 net store closures and 106 fewer stores year on year. This compares to a sales contribution from net new space of 1.3 percentage points year on year, or 60% of the contribution from so-called new space. Overall, taking optimization of existing stores and catchment areas together with net new space, the combined benefit to sales of our strategic actions on our store estate was 2.1 percentage points. This compares to a 0.7% net increase in our selling space year on year, clearly demonstrating improved productivity from our actions. Moving now to our outlook and guidance for the year. First with our market outlook. In May, we set out the conditions under which we could see a weaker, or indeed on the optimistic side, a stronger market growth outlook this year. We outlined an expectation for market growth to be muted in FY27, shaped by a weaker spending outlook for our core customer demographic and ongoing product cycle evolution at some of our brand partners, particularly in footwear. Since then, we have seen ongoing geopolitical and macroeconomic volatility driving a more challenging consumer backdrop. We saw this particularly as the second quarter progressed with elevated consumer cost of living pressures alongside a slower environment for high heat footwear product against a highly promotional market backdrop, particularly in the US. As a result, and consistent with our Q2 trading statement last month, we have reflected these headwinds persisting into H2 within our view on annual market growth for each key region. We expect North America to be weaker, while our view on Europe and the UK is unchanged. Moving to our guidance for the year. Firstly, within our sales performance, we continue to expect net new space growth to contribute 2-3%. on profit before tax and adjusting items we reiterate our guidance range of 700 to 800 million pounds given the macro and industry backdrop and our two biggest trading periods yet to come we believe it's prudent to continue guiding to a wider range our free cash flow of 460 million to 520 million pounds is unchanged underpinned by our ongoing cost and capital discipline In line with our capital allocation framework and confidence in our medium term trajectory, we are committed to delivering attractive cash returns to shareholders. The board has declared an interim ordinary dividend of 0.4 pence per share, 21% higher year on year, and we are on track to complete the current 200 million share buyback this financial year. We reiterate our confidence in our cumulative free cash flow target of at least 1.4 billion pounds over three years and remain committed to our rolling annual share buyback program. With my review concluded, let me hand back over to Regis for the business update.