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On Monday, Deutsche Bank adjusted its stance on shares of JD (NASDAQ:JD) Sports Fashion plc (LSE:JD) (OTC:JDDSF), downgrading the stock from Hold to Sell and revising its price target to £1.10 from the prior £1.15. The firm's revised forecasts for the retailer are 6.5% below the lower end of the company's guided range, prompting concerns about the stock's current free cash flow (FCF) yield premium compared to its peers.
The bank anticipates a modest organic revenue growth of +6% for the fiscal year 2025, aligning with the bottom of JD Sports' guidance. However, expected flat like-for-like sales, within the guided range of 1-4%, may result in a lower profit margin. While there could be a potential uplift in gross margin as promotional activities decrease, the analyst notes that subdued spending in the overall category dampens expectations.
The guidance provided by JD Sports suggests there is only a low single-digit percentage room for operating expense growth after adjustments for depreciation, amortization, and provision release. This forecast is deemed challenging given the mid-single-digit percentage increase in retail space and rising costs.
The focus of the analysis remains on free cash flow due to a significant gap between depreciation, amortization, and capital expenditures, which does not fully reflect the cost of growth. This gap has led to worsening cash conversion, which may eventually impact profit margins as it narrows over time.
Despite the stock's seemingly low valuation compared to its historical performance and its peers on a price-to-earnings basis, the target price of 110 pence is driven by an average free cash flow yield of 7.5% expected in the calendar year 2025 among peers. This adjustment reflects the bank's view on the unwarranted premium JD Sports' stock currently holds in the market.
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