This is an analytical study of why JD Sports Fashion became successful. The success of JD in the last decade saw shareholders made 15 times their initial capital! But it wasn't plain sailing because the previous decade before that (1996-2006), shareholders lost 8%, despite sales growth! So, what transformed JD Sport into the giant sportswear distributor, today? Find and read about JD Sports rise to the top.

1. April 13, 2017
Authored by: Walter Hin
12 Reasons Why JD Sports is the King of
Trainers
An analytical study of why JD Sports Fashion became successful
BONUS MATERIAL: The Real Reason behind JD Sports is
through Acquisitions made at the Right Price.

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Company name: JD
Sports PLC
Ticker: JD
Exchange: Main
Market (FTSE 250)
CEO: Peter Cowgill
Current Share Price:
450p/share
MKT. CAP. (£m):
£4.37bn
Shares Outstanding:
973m
Free Float: 402m
P/E: 24
Dividend Yield:
0.34%
Net Cash: £214m
Shareholders’ Equity:
£552m
SUMMARY
-The share price is up 1,584% in the
last decade. (i.e. Invest £10,000 and it
turns into £158,400!)
-This share price appreciation didn’t
happen in the previous decade (1996-
2006) when the shares lost 8%.
-JD owns a lot of brands through
acquisitions, such as Cloggs, Blacks,
Millets, Chausports and Ultimate
Outdoors.
-The Sportswear increased their real
estate from 1.2m Sq. Ft. to 3.5m Sq. Ft.
in ten years.
-JD been growing its revenue at a
compound rate of 12.2% per year.
-JD’s operating margins improve from
1.8% during 2004/05 to 8%.
-JD bought Blacks Leisure for £20m,
when the business was generating
£200m in Sales.
-It bought Canterbury Europe for £6.5m
in 2009 and sold it three years later for
£22.7m for 170% return on investment.
Their most recent acquisition was a
£112.3m deal for Go Outdoors that
makes £3.7m in net profit.

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Shareholders in JD Sports (LSE: JD) are pleased with the reward for buying and
holding this stock. If you ignore dividends, capital appreciation gains are
1,584% in the last decade. (i.e. Invest £10,000 and it turns into £158,400!) And
the unique selling point of JD? It distributes brands sportswear and acquired
failing outdoor and sportswear brands.
JD Sports not that Special
I’m not cussing JD Sports and its success. The gains delivered to shareholders
is a dream that other companies can only fantasize. But, there is nothing special
about JD Sports (I mean the standalone brand).
What do I mean?
Prior, to the colossal gains between 2007 and 2017, the previous decade before
that, its market performance was mediocre.
GRAPH 1

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The market valuation of JD in the beginning of 1996 was £134m and ended 2006
with a market value of £139m. In share price terms, you would have lost 8% of
your initial capital.
So, what has transformed JD Sports into the powerhouse that it is today?
Here are 12 facts that contribute to making the king of selling trainers great.
12 THINGS THAT GOT JD SPORTS SHAREHOLDERS
1,584% GAINS
WORKOUT FACT 1: RISING PROFITS AND INCREASING MARGINS

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GRAPH 2
Notice the first three years, JD barely earns £8m per year, and operating margins
was a small 1.5%. From 2007 onwards, other sports retailers begun to unravel.
JD started to see improvement in margins and absolute profits.
In fact, operating profits is £133m by 2016, a 1,900% increase from 2004.
WORKOUT FACT 2: JD SPORTS WIDE-RANGING BRANDS COLLECTION

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Apart from the above brand logos, JD, also owned Chausports, Splinter, Kooga,
Kukri, Get The Label, Focus, Source Lab, Tessuti, Cloggs, Nicholas Deakins,
Mainline, Blacks, Millets, Tiso and Ultimate Outdoors.
That is a lot of brands and extra store fronts under JD’s portfolio. Also, by taking
over these brands, JD lessen the competition and boost margins.
I won’t go into details why acquisitions makes JD stronger because I will do a
separate article. (So, watch this space)
WORKOUT FACT 3: SUPERME PROFITABILITY RATIOS
GRAPH 3

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The improvement in JD’s profitability ratios played a part in increasing its market
value. Higher returns mean higher margins, but it also means there is a likelihood
of earning positive free cash flow.
WORKOUT 4: JD POSITIVE + INCREASING FREE CASH FLOW
GRAPH 4
As mentioned earlier, JD Sports earn positive free cash flow, despite its
acquisitions spree. With free cash flow, JD can choose to built-up its war chest or
payout extra dividends from internal operations.

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WORKOUT FACT 5: GREENBLATT’S Return on Capital
GRAPH 5
One of Greenblatt’s magic formula, the returns on capital is defined as EBIT
over tangible assets and net working capital less cash. JD is able to
earn over 100%, based on the required assets needed to keep operations
running smoothly. (While it ignores intangibles, cash and debt.)
One weakness of Greenblatt’s formula is ignoring debt, especially when it is used
to acquire businesses. (this tends to include goodwill, in most cases)
For example, a company buys a business for £100m, but the net value is £20m.
It also earns EBIT of £5m. The company borrows the £100m from the banks to
do the deal. The accounting transaction would be:
£20m – Tangible assets; £80m – Goodwill, and £100m – Total Borrowings.

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Using Greenblatt’s formula, the returns is 20%, when you ignore £80m in
goodwill, £100m in borrowings. Also, we haven’t account for extra interest costs
on the new borrowings.
By including all intangibles, (let’s say there is a 4% interest on the £100m of
borrowings), the returns would be 1%!
£5m minus £4m (interest costs) = £1m, then the (£1m/£100m) *100 = 1%!
The reason that validates Greenblatt’s formula for JD Sports is total debt is low at
£6.75m (been declining for years). Intangible assets saw an increase of £20m in
six years, while sales up by 150%. Plus, there is a cash build-up to £215m.
WORKOUT FACT 6: ASSETS ARE GETTING YOUNGER
The number of stores and retail space that JD Sports occupy on the High Street
has increased from 1.2m Sq. Ft. in 2007 to 3.5m Sq. Ft. in ten years.
GRAPH 6

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With younger assets and increasing earnings, what not to like about JD? Also,
JD is able to acquires without incurring excessive “Acquisition Costs”, meaning
less goodwill on its balance sheet. Also, debt is tiny (£6m vs. net profit of
£133m).
As I said earlier, JD’s acquisitions strategies is key to its success.
WORKOUT FACT 7: JD CAPEX SPENDING MONEY WISELY
Apart from the blip in 2014, JD manages to increase sales greater than capital
investment. (shown in the blue line, >1 = Sales greater than capex)

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P.S. I use current year sales increase vs. previous year capex, to account for
time-lag in generating the sales.
GRAPH 7
Over the 12-year period, every BRITISH POUND spent by JD, it manages to
produce an extra £2.45 in sales. Even JD’s operating profits covers capex at
1.07X in the same period.
Investors should remember that capital investment can generate new sales two,
three or four years into the future. This is because the stores become more
efficient over time. And more customers realizing the new JD store is within
walking distance.
WORKOUT FACT 8: JD SPORTS, a CONSERVATIVE DIVIDEND-PAYER

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GRAPH 8
JD’s dividend yield is the lowest since 2004 at 0.54%. Instead, the sportswear
distributor has cleared up its debts and build its cash reserves in the bank
balance. (which stands at a record high of £215m) Clearly, this didn’t affect the
share price.
Also, JD can (easily) pay more dividends, as the dividend payout ratio is 0.13,
thus translates to 7.28 times dividend cover.
Long-time holders of JD Sports (if you held the stock for 12 years), would see the
current level of dividends equate to 15.1% dividend yield. That is because market
value in 2004 average £90.95m and dividends paid total £13.82m.
(£13.82m/£90.95m) *100 = 15.1%

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WORKOUT FACT 9: JD’s MARKET VALUATION AT RECORD HIGHS
GRAPH 9
The company’s EV/EBIT Ratio touches all-time high at 25 times with PE Ratio
clocking in at 37 times (highest since 2007). We can speculate and make
suggestions that JD’s shares looked overheated, but this post is about JD
SPORTS making money for investors.

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WORKOUT FACT 10: DON’T SLEEP ON JD’s SALES
You can’t dismiss JD’s revenue growth, especially when debt is in control.
GRAPH 10
JD’s revenue growth is so great it averages at a compound rate of 12.2% per
year. (Fund managers would kill for this kind of returns, even if its vanity)
WORKOUT FACT 11: JD’s SUPERIOR CASH GENERATION
Measuring JD’s cash generation, you soon realized how well it generates cash.
Using Cash Flow Return on Investment (CFROI), the percentage exceeds 100%.
That is when you add the company’s debt and equity, but minus the cash, JD’s
cash earnings exceed this on an annual basis.

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GRAPH 11
This marks a big difference when it struggles to appreciate its market value as
CFROI fails to exceed 25% between 2004 and 2006.
WORKOUT FACT 12: JD HAS REAL NET CASH
People use TOTAL DEBT minus TOTAL CASH to derive net debt/cash. A more
realistic and accurate measure is to account for prepayments and accruals. So,
net cash/debt is: CASH + Receivables minus total debt and payables.
GRAPH 12

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Now, the company is riding on £112m of net cash.

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Bonus Material: The Real Reason behind JD Sports is
through Acquisitions made at the Right Price
One contributing factor to JD Sports success is their acquisition strategies.
Making the right acquisition and at the right price in the right business cycle
is what makes JD so successful.
Here is a table of JD Sports acquisitions:
Below is a detail look at seven acquisitions that JD has made. Some will
include previous financial results, so you can judge whether these are good
acquisitions.
Afterwards, we evaluate how these acquisitions propelled the status and
branding of JD Sports.
The Seven Acquisitions made by JD Sports
Chausport

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In 2009, JD bought this French Sportswear for €8m or £7m. The
accounts ending in December 2007 has reported a turnover of €40.7
million and pre-tax profits of €600,000.
The 78 stores obtained by JD Sports would help promote themselves in the
French market.
Canterbury Europe
JD bought this business for £6.5m in 2009 but then sold it to Pentland
Group for £22.7m, three years later.
At the time of purchase, Canterbury Europe had sales of £29m with
operating loss of £500,000.
That sales made JD £16.2m or 170% investment return.
Regardless, here is a brief financial history of Canterbury Europe.
Table

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BLACKS Leisure
In 2012, JD Sports made the winning bid and bought Blacks Leisure for
£20m. The money goes to paying the loans Blacks owed to the banks
leaving their shareholders in the dust.
Go to the Companies House website, last accounts filed were for 2011. In
it, Blacks owned three brands (Blacks, Millets and Freespirit). The
subsidiary has a total of 308 stores to JD’s 500 stores. Also, Blacks has
sales of £200m. Below is the details of the subsidiary business:
Table 2
How does this acquisition compare with JD Sports
valuation?
On the basis of sales, JD bought Blacks on a Price to sales = 0.1, while
JD’s sales value it on P/S of 0.31.
On a Price to Book basis, the market values JD at 1.6 times, whereas JD
bought Blacks on 0.6 times.
What makes this acquisition successful?

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Remember, I mentioned 308 stores (ignoring Freespirit, this goes down to
290) owned by Blacks before JD Sports acquired it.
On 2016’s JD Sports annual report, the total numbers of Blacks and Millets
store, combined fell to approx. 160. The closure of 130 stores would lead
to lower sales. So, this would increase operational efficiency leading to
profitability.
Kukri Sports Limited
JD bought this kit manufacturer for more than a £1m (assume it is under
£2m) in 2011. More accurately, it was an 80% majority stake in the
company. Turnover for Kukri in 2010 is £13m, but has negative equity of
£2.3m.
This is Kukri Sports financials in the last three years:
Table 3

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Champion Sports (Holdings)
JD Sports bought Champion for €20m. Champion has a turnover of €54m
in 2009.
Go Outdoors
In one of JD biggest and latest acquisition is this outdoor retailer for
£112.3m deal. It has revenue of £202.2m with a £4.9m profit before tax or
£3.7m in net profit.
The company operates 58 stores in the UK, which was owned by private
equity owners YFM Equity Partners and 3i Group.
This business has similar revenue numbers to Blacks, but JD paid six
times more for Blacks. At least Go Outdoors is expanding and profitable,
but we can’t argue that JD turnaround (the closure of 130 Blacks stores)
would make Blacks profitable today.
Only time will tell if this latest acquisition earns JD Sports high returns from
investments.
Below are the financial numbers for Go Outdoors:
Table 4

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Sports Unlimited Retail BV
Another 2016’s acquisition is two Dutch Sports Business by setting up a
new Dutch subsidiary called Sports Unlimited Retail BV. The names of the
two businesses are called Aktiesport and Perry Sport.
The thing is JD buys them from a Trustee called Unlimited Sports Group
BV. Afterwards, it will declare bankruptcy (you can’t make this stuff up).
The cash consideration of €26.5m (£20.9m) is payable. But excludes
fees, retention of title and other claims arising consequent upon the
bankruptcy process.
On both these businesses financials:
“For the year ended 31 December 2014, the combined Aktiesport and
Perry Sports businesses delivered consolidated revenues of €159.4m, an
operating profit of €1.5m, a profit before tax of €0.2m and gross assets of
€67.4m.”
Okay, we learn a lot about JD acquisition strategy, although some of them
are new and require time to pan out.

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What have we learned from these acquisitions?
JD Sports acquired £657m of sales for £184m
The ultimate truth of JD Sports secret recipe for acquisition revealed.
About the seven acquisitions made by JD and mentioned in this post.
JD bought in sales of £657m by paying £184m for these businesses. That
is 0.28 times of acquired sales. Meanwhile, JD Sports has an average price
to sales ratio of 0.52 times in the past eight years.
Remember, if JD Sports pursue a cost-cutting strategy, then further
reduction in sales is likely, but with a higher probability of profitability. But,
at the same time, if JD market their brands alongside the acquired brands it
would increase sales.
Why JD manages to increase margins?
In my last JD’s post, I discuss one factor of share price appreciation
success is down to the ability to increase their margins. (the link is found at
the beginning of the post)
That big contributing factor is down to the reduction in competition at the
domestic UK markets. Secondly, JD management acts like private equity
firms. By cutting excess cuts and turning their subsidiaries around.
Lastly, JD bought these businesses at the bottom of the market or from an
administration. That means JD did not need to borrow money externally
(saving interest costs). Also, they pay as low as possible to shorten
payback period and can generate higher returns from investments.

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So, is it surprising that JD manages to achieve capital gains of over
1,500% between 2007 to 2016? Compare that to the previous decade
(1996 to 2006), JD shareholders lost 8% on initial investment!
Call to Action
Are their facts that I missed?
What are your views on JD?
So, have you learn anything from JD’s acquisition strategies?
Or, are there other factors I have not mentioned which are
detrimental to JD success?
For those who want to Comment, please refer back to the link of the
original article on my website at Walbrock Research:
A. “12 REASONS WHY JD SPORTS IS THE KING OF SELLING
TRAINERS”
B. “Learn why acquisitions make JD Sports more competitive”
If you like these articles, then you might be interested in Debenhams PLC
and French Connection:
1. “Should you invest in Debenhams PLC for retirement income?”
2. “Why French Connection should change course before the “retail
curse” swallow it up?”
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