Financial Analysis of JD Sports: Performance and Valuation Report

This report provides a comprehensive financial analysis of JD Sports, examining its financial performance, industry position, and strategic outlook. It begins with a company overview and delves into the UK clothing industry, economic outlook, and competitive landscape. The report includes a SWOT analysis to assess the company's strengths, weaknesses, opportunities, and threats. A key component is the decomposition of Return on Capital Employed (ROCE) using the DuPont analysis. Furthermore, the report explores valuation methodologies such as discounted cash flow (DCF), dividend yield, and market-based valuation, comparing their results. The analysis covers financial data from 2016 to 2019, offering insights into JD Sports' performance and financial health, culminating in conclusions and recommendations based on the findings.

Running head: FINANCIAL ANALYSIS
Financial Analysis
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1FINANCIAL ANALYSIS
Table of Contents
Introduction......................................................................................................................................2
Discussion and Analysis..................................................................................................................2
Company Overview.....................................................................................................................2
Industry Performance, Economic Outlook and Competitive Analysis........................................3
UK Clothing Industry Analysis...............................................................................................3
Economic Outlook...................................................................................................................5
Competitive Analysis...............................................................................................................7
Strategic Appraisal.......................................................................................................................7
Decomposition of ROCE...........................................................................................................10
Valuation....................................................................................................................................11
Discounted Cash Flow Method.................................................................................................11
Weighted Average Cost of Capital........................................................................................12
Asset Based Valuation...............................................................................................................13
Market Based Valuation............................................................................................................13
Dividend Yield...........................................................................................................................13
Dividend Discount Model..........................................................................................................14
Comparison of Valuation...........................................................................................................15
Conclusion & Recommendations..................................................................................................16
References......................................................................................................................................17

2FINANCIAL ANALYSIS
Introduction
The financial analysis has been done for the JD Sports company in which the analysis has
been done based on the financial as well as business performance shown by the company. The
analysis has been done especially for the company by analysing the industry in which the
company performs, its financial performance and the economic outlook that the company carries
from a business perspective. Strategic Analysis of the company has been well done with the help
of the SWOT Analysis for the company which included both the internal as well as some of the
external features that are related to the company. The analysis of the ROCE has been well down
with the help of the DuPont Analysis in which the various components and factors like Net Profit
Margin. Return on Assets and Financial Leverage of the company. Valuation of the company
alongside has been well performed with the help of the Discounted Cash Flow Valuation,
Dividend Yield Valuation and Multiple Based Valuation for the company. Further the models
used in the analysis has been well compared based on the features and factors that are included in
the analysis of each of the model included.
Discussion and Analysis
Company Overview
JD Sports Fashion PLC was well established in the year 1981 whereby the company has
established as a sports-fashion retail company that is based in Bury, Lancashire, England which
is having its fleet of shops throughout the United Kingdom, Europe, United States, Asia and
Australia. The product line and categories of the company are well expanded into clothing,

3FINANCIAL ANALYSIS
sportswear and sports accessories rather been confined to a single product. Diversification in the
product line offered is well undertaken by the management of the company. The company has a
sound number of employee base to well support its daily operations which are around 32,125
employees which helps the company in well operating the daily business activities of the
company. Financial risk exposure of the company in terms of debt to equity ratio also has been
comparatively low for the company which in turn has allowed the management of the company
well manage the financial risk of the company (JD Sports Fashion PLC Financial Statements -
WSJ 2020). The financial performance of the company and the business activities of the
company has been growing constantly whether it has been in the field of operating income or in
the field of asset turnover that has been generated by the company.
Industry Performance, Economic Outlook and Competitive Analysis
UK Clothing Industry Analysis
The clothing industry is the biggest business in the UK Industry and primarily accounts
for majority of the exports that are done from the country. The wool trade industry of the UK
once accounted for almost 80% of the exports from the British Isles. The fashion industry of the
UK is currently worth around £26 Billion and gives jobs to around 800,000 people in the UK,
which makes the industry not only the largest industry but also a lucrative one (Apparel market
in the UK 2020). The apparel and clothing market in the UK has shown a steady growth in the
last seven years and whereby it was well expected that by the year 2020 to set the industry
market value at around 66.0 Billion Euro. In addition to the market value the annual expenditure
that is seen on the clothing, the sales volume has also shown a tremendous growth which has
reached to around 58.3 Billion Pounds. At the same time it is important to note that the majority
of the cloth purchase is dominated by women’s garments which has well accounted for double

4FINANCIAL ANALYSIS
the value of men’s outwear purchasing capacity. The UK Economy has shown a consumer
expenditure of 56,048Million GBP and comprise of about 5% of the total consumer expenditure
that the UK Economy has reported.

5FINANCIAL ANALYSIS
Economic Outlook
The UK Economy has well struggled for gaining momentum after well avoiding a reason
recession in the third quarter of last year. Slowdown in the global growth has particularly driven
by trade decisions, which is well elevated due to uncertainty that is evolving over the nature of
Brexit and a political instability that has evolved in the UK (United Kingdom 2020). There has
been a dropdown in the Industrial Activity is partly attributable to a global slump in the
manufacturing, with the ongoing US-China trade war, which is conflicting a weight on the
growth of UK Economy. In addition the uncertainty regarding the Brexit-related has related to
the risk of a “no-deal” Brexit last October.

6FINANCIAL ANALYSIS
Elevated economic policy and uncertainty in the political scenario had a dampening effect on the
level of consumer spending. This has been particularly due to resilient labor market, which is
having its lowest level of unemployment in the last 45 years of time period as shown below in
the time period of rising wages.

7FINANCIAL ANALYSIS
Competitive Analysis
The competitive analysis can be well analyzed based on the top or large cap companies
that are operating in the Clothing and Apparel Industry in the UK. The top companies that are in
fashion when compared in Market Cap valuation terms are as follows:
1) Burberry Company
2) Next Plc.
3) Mark & Spencer
4) ASOS PLC
5) Foot Locker
The biggest company in the region of UK based on the market capitalization method is
the Burberry Group PLC. The luxury fashion company is well valued over the 10 Billion Dollar
and had a revenue of 3.8 Billion Dollar in the year 2017 (UK fashion industry statistics, 2020).
Burberry well sell its range of products with range of retail and wholesale channel, retail sales
that is well accounted for 77% of the revenue compared for 22% from wholesale.
Strategic Appraisal
The strategic appraisal of the company can be well carried out with the help of SWOT
Analysis of the company in which both the external and internal factors would be well compared
in respect to the industry as well as business or company related factors. SWOT Analysis
purpose can be well used as a key strategy for the well identifying the strategies that a firm can
well use for exploiting opportunities, counter threats (JD Sports Fashion | Business | The
Guardian 2020).

8FINANCIAL ANALYSIS
Strengths: The sports apparel company as a leading brand in the industry has some of the key
strength which are as follows:
 Reliable Suppliers: The Company is having a string supplier base which was well
allowed the company procure raw materials effectively without interrupting the
operations of the company (Fish 2019).
 Distribution Market: Strong and wide accessible markets with the help of sound
distribution networks has allowed the company reach out to millions of customers and
sell its products majorly across the globe.
 Strong Brand Portfolio: JD Sports over the last years have built a strong brand
portfolio which has enabled the company help built a strong goodwill and brand image.
 Sound Cash Flows: The cash flows flowing from the business has been strong and
growing at a reliable and consistent rate which has allowed the company grow
exponentially.

9FINANCIAL ANALYSIS
Weakness: The key business loopholes or inefficiencies which can well hurt the operations and
daily business activities are as follows:
 Limited Success outside Core Business Area: The Company has faced many
challenges while it has tried to well diversify its business activities and that has been
primarily due to inefficiency of company in well understanding the market.
 Technological Support: The technological support which the company would be well
getting from plant and machinery is comparatively not adequate and this has been the key
reason why it was not able to achieve economies of scale.
Opportunities: External Strategic opportunities that are arising for the company are well in the
form of business environment are as follows:
 Decreased Transportation Cost: Reduction in the transportation cost due to better
connectivity and logistics systems has well allowed the company reduce its transportation
cost which in turn is helping reducing the overall operational cost.
 Government Green Drive: The initiative taken by the government would be boosting an
additional opportunity for the procurement of JD Sports Fashion products by Federal
Government Contractors as well as by the State.
 Increase in Consumer Spending: The increase in consumer spending would be boosting
down the additional sales that the company would be seeing from the same (JD Sports
Outperforms Struggling UK Retail Sector 2019).
Threats: External threats or problems which is hampering down the business operations are as
follows:

10FINANCIAL ANALYSIS
 Liability Laws: The laws prevailing in each of the countries differs from one to another
and any changes in the policies, rules and regulations can well put a liability given the
change in rules and regulations.
 Unavailability of Skilled Labor: The Company usually goes through a shortage of
skilled labor force due to which company has to undergo slower pace of operations and
inefficient management of resources.
 Intense Competition: The level of competition that is existing in the clothing and
apparel industry is challenging and quite high which sometimes makes difficult for the
company to well maintain its market share.
Decomposition of ROCE
The decomposition of the ROCE for the company can be well done or carried out with
the help of ROCE Analysis which helps to incorporate profitability, asset turnover as well as
leverage aspects of the company for well determining the ROCE that the company is generating.
The key set of formula that has been well applied for the purpose of calculating the ROCE is as
follows:
 ROCE: EBIT*(1-Tax)/ Capital Efficiency.
 ROCE: Operating Profit Margin*Capital Efficiency
 ROCE: (After Tax Operating Profit/Revenue)*(Sales/Capital Employed).
The analysis has been done from the year 2016-2019 whereby relevant changes in the
financials of the company has been considered. Changes in the operating profit margin and the
capital efficiency ratio are some of the key factors driving the ROCE for the company. The
operating profit margin for the company has increased consistently for the company for the
company from the year 2016 to 2018. The margin was around 5.62% in 2016 and the same has

11FINANCIAL ANALYSIS
well increased to around 7.52% in the year 2018. However, the same has fallen down to around
5.73% in the year 2019 and this has been probably due to the increased amount of administrative
expenses that the company have reported for the year 2019. On the other hand side the capital
efficiency ratio was around 4.76 times in the year 2016 which decreased to around 4.05 times in
2018 and then has increased to around 4.41 times in the year 2019. The increase in the year 2019
has been particularly due to the increase in equity finance by the company. Similarly the ROCE
for the company was around 26.76% in 2016, which increased to around 30.43% in the year
2018 and then decreased to around 25.26% in the year 2019. The detailed analysis has been well
shown down as follows:
Return on Capital Employed Decomposition
Particulars 2016 2017 2018 2019
Operating Income 133.41 239.79 295.9 346.2
Provision for Income Tax 31 53.79 58.1 75.7
After Tax Operating Income 102.41 186 237.8 270.5
Revenue
1821.6
5
2378.6
9 3161.4 4717.8
Operating Margin (%) 5.62% 7.82% 7.52% 5.73%
Sales/Revenue
1821.6
5
2378.6
9 3161.4 4717.8
Shareholder's Equity 382.42 552.25 770.4 1008.8
Long Term Debt 0.27 2.53 11.0 62.2
Total Capital Employed 382.69 554.78 781.4
1071.0
0
Capital Efficiency Ratio 4.76 4.29 4.05 4.41
ROCE 26.76% 33.53%
30.43
% 25.26%